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Fiscal Consolidation and Income Inequality

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1970 to 2010, we find that income inequality significantly rises both during periods of fiscal consolidation and in the aftermath of such adjustments. In addition, fiscal authority that is driven by spending cuts seems to be more detrimental for income distribution than in the case of tax hikes. Considering the linkages between banking crises and fiscal consolidation, we show that the impact on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Our results also provide support for the Kuznets relationship and corroborate the idea that trade can lead to a more unequal distribution of income.

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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2011/NIPE_WP_34_2011.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 34/2011.

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Date of creation: 2011
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Handle: RePEc:nip:nipewp:34/2011
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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  1. Jeffrey R. Brown, 2010. "Tax Policy and the Economy, Volume 24," NBER Books, National Bureau of Economic Research, Inc, number brow09-1, 07.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
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  7. Luca Agnello & Ricardo M. Sousa, 2011. "How do Banking Crises Impact on Income Inequality?," NIPE Working Papers 30/2011, NIPE - Universidade do Minho.
  8. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  9. John J. Heim, 2011. "Do Deficits Crowd Out Private Borrowing? Evidence From Flow Of Funds Accounts," Rensselaer Working Papers in Economics 1102, Rensselaer Polytechnic Institute, Department of Economics.
  10. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  11. Bertola, Giuseppe, 2009. "Inequality, Integration, and Policy: Issues and evidence from EMU," CEPR Discussion Papers 7251, C.E.P.R. Discussion Papers.
  12. Carlos Mulas-Granados, 2005. "Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality," Hacienda Pública Española, IEF, vol. 172(1), pages 61-92, June.
  13. Agnello, Luca & Sousa, Ricardo M., 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank.
  14. Philippine Cour & Eric Dubois & Selma Mahfouz & Jean Pisani-Ferry, 1996. "The Cost of Fiscal Retrenchment Revisited: how Strong is the Evidence?," Working Papers 1996-16, CEPII research center.
  15. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  16. John J. Heim, 2011. "Do Tax Cut And Spending Deficits Have Different Crowd Out Effects?," Rensselaer Working Papers in Economics 1104, Rensselaer Polytechnic Institute, Department of Economics.
  17. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  18. Biorn, Erik, 2004. "Regression systems for unbalanced panel data: a stepwise maximum likelihood procedure," Journal of Econometrics, Elsevier, vol. 122(2), pages 281-291, October.
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  20. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
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  23. António Afonso & Ricardo M. Sousa, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," Working Papers Department of Economics 2009/09, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  24. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
  25. repec:hrv:faseco:3353756 is not listed on IDEAS
  26. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  27. Pablo Hernández de Cos & Enrique Moral-Benito, 2011. "Endogenous fiscal consolidations," Banco de Espa�a Working Papers 1102, Banco de Espa�a.
  28. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242.
  29. Baltagi, Badi H. & Chang, Young-Jae, 1994. "Incomplete panels : A comparative study of alternative estimators for the unbalanced one-way error component regression model," Journal of Econometrics, Elsevier, vol. 62(2), pages 67-89, June.
  30. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.
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