'Mind the Gap': Are Sovereign Spreads a Significant Factor for Explaining Income Inequality in the Euro-Zone Periphery?
18 Pages Posted: 25 Jun 2014
Date Written: June 23, 2014
We explore whether sovereign spreads/yields, when considered along with real GDP, unemployment and inflation have had any significant effect on the equality of income distribution for a series of country-members of the European Union (plus Norway). Additional focus is given on countries of the European periphery that have undergone a “Troika-like” program and have undertaken radical policies towards fiscal consolidation and debt reduction. Using panel data, our results show that neither the sovereign spreads nor sovereign borrowing costs have had a statistically significant, direct effect upon income distribution in the European periphery; rather, growth and unemployment rates (and possibly inflation) tend to matter more. However, we do find an indirect, non-linear effect using a double-layer model, where the effects of interest rates and spreads on inequality are estimated via their pass-through on growth and unemployment. This study comes to shed more light on the potential relationship between sovereign spreads and equality in income distribution during the latest turbulent years in the European Union, hence, an area little investigated so far. Our results provide useful guidelines for policy makers interested in implementing policies for maintaining social cohesion.
Keywords: income inequality, inflation, growth, sovereign spreads, unemployment
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