The Fiscal Policy - Inequality Nexus in Developing and Advanced Economies: Difference-Based Policy Insights

Fiscal policy plays a critical role in the economy, helping governments to manage economic cyclicality and correct market failures. It also plays a significant role in reallocating national income, which can have an impact on income inequality in society. However, the effects of fiscal policy on income inequality may differ between developed and developing countries. To investigate it, the paper applies the system GMM and PMG estimators to empirically study the influence of fiscal instruments on inequality for a sample of 30 advanced economies and 34 developing economies from 2002 through 2020. The results show some interesting findings. Firstly, fiscal instruments tend to reduce inequality in advanced countries but increase it in developing countries. Secondly, economic growth can lead to greater inequality in developed countries, while it reduces inequality in developing economies. Finally, unemployment in advanced economies and education in developing economies tend to enhance income inequality. These findings offer valuable policy lessons for governments seeking to use fiscal policy to address income inequality in society.