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The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe

The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe

Obst, Thomas, Onaran, Özlem ORCID: 0000-0002-6345-9922 and Nikolaidi, Maria (2017) The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe. [Working Paper]

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Abstract

This paper develops a multi-country Post-Kaleckian model augmented by a government sector with public spending and taxes on consumption, labour and capital and estimates it for the EU15 countries. We estimate country specific equations to find the effect of income distribution, public spending and taxes on growth, on each component of private aggregate demand (i.e., consumption, investment, and net exports) and on budget balance for the EU15 countries. Next, we calculate a Europe-wide multiplier based on the responses of each country to changes not only in domestic income distribution, taxation and government expenditure but also to changes in the other European countries’ wage share, taxes and public spending. One novelty of this paper is that it goes beyond an isolated country-by-country analysis and integrates cross-country effects of a simultaneous change in the wage share on demand in Europe in a government augmented Post-Kaleckian model.Extending the model by taxes on labour and capital increases the likelihood of a wage-led economic regime. The fiscal multiplier effects are much stronger when policies are implemented simultaneously, and wage, tax and public spending policies are integrated into the policy mix. The impact of egalitarian wage policies are positive but small; the overall stimulus becomes much stronger when mixed with fiscal expansion. Expansionary fiscal policy is sustainable when wage, public spending and progressive tax policies are combined. The analysis of the paper can guide the development of a fiscal and wage policy mix conducive to equitable development.

Item Type: Working Paper
Uncontrolled Keywords: Wage share; growth, European multiplier; demand regime; government sector; public spending; tax policy;
Subjects: H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Faculty of Business > Greenwich Political Economy Research Centre (GPERC)
Last Modified: 04 Apr 2017 10:20
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/16088

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