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FISCAL CONSOLIDATION PROGRAMS AND INCOME INEQUALITY
Author(s) -
Brinca Pedro,
Ferreira Miguel H.,
Franco Francesco,
Holter Hans A.,
Malafry Laurence
Publication year - 2021
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12482
Subject(s) - consolidation (business) , economics , inequality , economic inequality , fiscal space , precautionary savings , fiscal policy , macroeconomics , monetary economics , finance , market liquidity , mathematical analysis , mathematics
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.