Hans Holter (UiO): Fiscal Consolidation Programs and Income Inequality
Welcome to our research seminar with Hans Holter from the University of Oslo.
Title: Fiscal Consolidation Programs and Income Inequality
Following the Great Recession, many European countries implemented scal consolidation policies aimed at reducing government debt. Using three independent data sources and three dierent empirical approaches, we document a strong positive relationship 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, including 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 responses to fiscal consolidation through either increases in taxes or decreases in government expenditures, and this explains the relation 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.