The effects of income distribution and fiscal policy on aggregate demand, investment and the budget balance: the case of Europe

This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometrically the effects of incom...

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Bibliographic Details
Published in:Cambridge journal of economics 2020-11, Vol.44 (6), p.1221-1243
Main Authors: Obst, Thomas, Onaran, Özlem, Nikolaidi, Maria
Format: Article
Language:English
Subjects:
Aggregate demand
Economic activity
Fiscal policy
Government spending
Income distribution
Progressive taxes
Progressivism
Taxation
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Summary:This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in EU15 countries. The results show that a simultaneous increase in the wage share in all EU15 countries would increase demand and the primary budget balance in all countries. A simultaneous increase in government spending turns out to boost economic activity in all the EU15 countries, indicating the positive economic effects of expansionary fiscal policy. Moreover, a progressive tax policy that would be implemented simultaneously at the EU level would lead to an increase in output in all countries.
ISSN:0309-166X
1464-3545
DOI:10.1093/cje/bez045