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The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries

Author

Listed:
  • Adrian Peralta-Alva

    (International Monetary Fund)

  • Marina Mendes Tavares

    (ITAM and IMF)

  • Xin Tang

    (International Monetary Fund and Wuhan University)

  • Xuan Tam

    (City University of Hong Kong)

Abstract

We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

Suggested Citation

  • Adrian Peralta-Alva & Marina Mendes Tavares & Xin Tang & Xuan Tam, 2018. "The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries," 2018 Meeting Papers 183, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:183
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    References listed on IDEAS

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    Cited by:

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    3. Hummel, Albert Jan & Ziesemer, Vinzenz, 2023. "Food subsidies in general equilibrium," Journal of Public Economics, Elsevier, vol. 222(C).

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