WP 06: Effects of fiscal consolidation on income inequality: narrative evidence from South America
Based on a narrative dataset constructed by David and Leigh (2018) that covers nine South American economies in the period 1982–2017, this paper estimates dynamic effects of fiscal consolidations on income inequality from Jordá (2005)’s local projections method. Results suggest that fiscal consolidations lead to a rise in income inequality in all specifications and data panels. When decomposing fiscal shocks, spending-based fiscal consolidations appear to significantly increase the Gini index, while tax-based fiscal consolidations do not show statistically significant effects on income inequality. The rise in the Gini index for disposable income caused by a spending-based fiscal adjustment of 1% of GDP varies between 1.74 and 3.22% in five years depending on the selected data panel (country-years). The magnitude of this effect is higher than in most of the previous studies carried out for OECD countries.
Keywords: income inequality; fiscal consolidation; fiscal austerity; South America; local projections.
JEL: D30; D63; E60; E62.
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