Income inequality and fiscal policy over the political cycle: a panel estimation model for emerging markets and developing economies

• Autores: Carrera, Jorge Eduardo; De la Vega, Pablo; Toledo, Fernando César
• Año de publicación: 2021
• Idioma: inglés
• Tipo de recurso: documento de conferencia
• Materia: Ciencias Económicas; Income Inequality; Fiscal Policy; Panel Data Models
• Institución: Universidad Nacional de La Plata

We assess the fiscal policy responses of Emerging Markets and Developing Economies governments to unexpected shocks that increase income inequality. We focus on the relationship between income inequality and public expenditure, progressive taxation, and public debt. We aim particularly on the strategic use of public debt to finance greater public expenditure targeted to lessen the negative effects of hikes in income inequality. To this end, we exploit the fact that a government that wants to be reelected will try to avoid social conflict and class struggle related to increases in income inequality. Thus, it is expected that increasing social inequalities induce more political pressures the closer the next executive election is. We estimate dynamic panel models for 49 Emerging Markets and Developing Economies with annual data for the 1990-2015 period. We find that the marginal effect of inequality on the public debt is increasing in the share of the executive term completed, and it becomes statistically significant after completing 85% of the corresponding term. This finding is robust to different empirical specifications and is more pronounced in Latin American Countries and for economies with higher external liabilities. The interaction term is not statistically significant in the other three cases (government consumption, progressive taxation, and the primary balance), which suggests that the relationship between income inequality and these variables is not mediated by the political cycle. However, there is a statistically significant and negative (positive) linear effect on income inequality on the government consumption (primary balance).
Facultad de Ciencias Económicas