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From Fiscal policy to Income inequality in Advanced economies Does Institutional quality matter

Author

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  • Van Bon NGUYEN

    (Faculty of Finance – Banking, University of Finance Marketing (UFM), Vietnam.)

Abstract

Governments use fiscal policy to correct market failures and reallocate national income, so fiscal policy can narrow income inequality in society. Does institutional quality matter for the fiscal policy – income inequality relationship in advanced economies? For the answer, the paper investigates the impacts of fiscal policy, institutional quality and their interaction on income inequality for a balanced panel dataset of 30 advanced economies from 2002 to 2020. It applies the system-GMM Arellano-Bond estimators for estimation. Then, it uses the PMG estimator to test the robustness. The results show that fiscal policy and institutional quality narrow income inequality, but their interaction widens. It seems counter-intuitive. In addition, economic growth and unemployment increase income inequality. The findings suggest some implications for improving institutional quality and using fiscal policy to reduce income inequality in the advanced economies.

Suggested Citation

  • Van Bon NGUYEN, 2023. "From Fiscal policy to Income inequality in Advanced economies Does Institutional quality matter," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 165-184, March.
    • Handle: RePEc:rjr:romjef:v::y:2023:i:1:p:165-184
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    References listed on IDEAS

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    3. Chandika Gunasinghe & E. A. Selvanathan & Athula Naranpanawa & John Forster, 2021. "Correction to: Rising Income Inequality in OECD Countries: Does Fiscal Policy Sacrifce Economic Growth in Achieving Equity?," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 33(3), pages 793-793, June.
    4. Ayse Demir & Vanesa Pesqué-Cela & Yener Altunbas & Victor Murinde, 2022. "Fintech, financial inclusion and income inequality: a quantile regression approach," The European Journal of Finance, Taylor & Francis Journals, vol. 28(1), pages 86-107, January.
    5. Chandika Gunasinghe & E. A. Selvanathan & Athula Naranpanawa & John Forster, 2021. "Rising Income Inequality in OECD Countries: Does Fiscal Policy Sacrifice Economic Growth in Achieving Equity?," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 33(6), pages 1840-1876, December.
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    More about this item

    Keywords

    fiscal policy; income inequality; institutional quality; advanced economies; system GMM estimator; PMG estimator.;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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