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Economic Growth and Inequality: The Role of Fiscal Policies

  • Leonel Muinelo

    ()

    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

  • Oriol Roca-Sagalés

    ()

    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

This paper analyses the impact of different instruments of fiscal policy on economic growth as well as on income inequality, using an unbalanced panel of 43 upper-middle and high income countries for the period 1972-2006. We consider and estimate two individual equations explaining growth and inequality in order to assess the incidence of different fiscal policies. Firstly, our approach considers imposing orthogonal assumptions between growth and inequality in both equations, and secondly, it allows growth to be included in the inequality equation, and inequality to be included in the growth equation. The empirical results suggest that an increase in the size of government measured through current expenditures and direct taxes diminishes economic growth while reducing inequality, being public investment the only fiscal policy that may break this trade-off between efficiency and equity, since increases in this item reduces inequality without harming output. Therefore, the results reflect that the trade-off between efficiency and equity that governments often confront when designing their fiscal policies may be avoided.

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File URL: http://www.ecap.uab.es/RePEc/doc/wpdea1105.pdf
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Paper provided by Department of Applied Economics at Universitat Autonoma of Barcelona in its series Working Papers with number wpdea1105.

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Length: 39 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:uab:wprdea:wpdea1105
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