Austerity, Inequality, and Private Debt Overhang
27 Pages Posted: 26 Jan 2017
Date Written: January 2017
Using panel data of 17 OECD countries for 1980-2011, we find that the distributional consequences of fiscal consolidations depend significantly on the level of private indebtedness. Austerity leads to a strong and persistent increase in income inequality during periods of private debt overhang. In contrast, there are no discernible distributional effects when private debt is low. This result is robust to alternative identifications of fiscal consolidations, to different ways of defining periods of private debt overhang, and to controlling for the state of the business cycle. We explore different channels through which our findings can be rationalized.
Keywords: austerity, fiscal policy, inequality, private debt, local projections
JEL Classification: E62, E64, D63
Suggested Citation: Suggested Citation