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Projeto de investigação
Essays on fiscal policy transmission mechanism under heterogeneous agents models.
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Fiscal consolidation programs and income inequality
Publication . Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
Following the Great Recession, many European countries implemented fiscal con-
solidation policies aimed at reducing government debt. Using three independent data
sources and three different empirical approaches, we document a strong positive re-
lationship between higher income inequality and stronger recessive impacts of fiscal
consolidation programs across time and place. To explain this finding, we develop
a life-cycle, overlapping generations economy with uninsurable labor market risk. We
calibrate our model to match key characteristics of a number of European economies, in-
cluding the distribution of wages and wealth, social security, taxes and debt, and study
the effects of fiscal consolidation programs. We find that higher income risk induces
precautionary savings behavior, which decreases the proportion of credit-constrained
agents in the economy. Credit-constrained agents have less elastic labor supply re-
sponses to fiscal consolidation achieved through either tax hikes or public spending
cuts, and this explains the relationship between income inequality and the impact of
fiscal consolidation programs. Our model produces a cross-country correlation between
inequality and the fiscal consolidation multipliers, which is quite similar to that in the
data.
Fiscal consolidation programs and income inequality
Publication . Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence; NOVA School of Business and Economics (NOVA SBE); Blackwell Publishing Ltd
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.
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Fundação para a Ciência e a Tecnologia
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SFRH/BD/116360/2016