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Fiscal Consolidation Programs and Income Inequality
[journal article]
Abstract We document a strong empirical relationship between higher income inequality and stronger recessive impacts of fiscal consolidation episodes across time and space. To explain this finding, we develop a life-cycle economy with uninsurable income risk. We calibrate our model to match key characteristi... view more
We document a strong empirical relationship between higher income inequality and stronger recessive impacts of fiscal consolidation episodes across time and space. To explain this finding, we develop a life-cycle economy with uninsurable income risk. We calibrate our model to match key characteristics of several European economies, including inequality and fiscal structures, and study the effects of fiscal consolidation programs. In our model, higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. These agents have less elastic labor supply responses to fiscal consolidations, which explain the correlation with inequality in the data.... view less
Keywords
budget consolidation; difference in income; public budget
Classification
Public Finance
Free Keywords
EU-SILC
Document language
English
Publication Year
2021
Page/Pages
p. 405-460
Journal
International Economic Review, 62 (2021) 1
DOI
https://doi.org/10.1111/iere.12482
ISSN
1468-2354
Status
Published Version; peer reviewed