The role of income inequality on fiscal multipliers

Abstract

This paper investigates the role of income inequality on the size of fiscal multipliers during the recent crisis. Using various measures of income inequality, the empirical strategy developed suggests a positive and statistically significant impact of inequality on the size of fiscal multipliers of European economies during 2010-11. The results are robust after controlling for the role of outliers, by adding controls that could be driving the results, testing for different forecast vintages, and using a different source of standardized income inequality data. Theoretical arguments that may explain the results are presented. Namely the existence of credit constraints to relatively poor households, and the lower propensity to consume of relatively wealthier households.