The Distributional Effects of Government Spending Shocks in Developing Economies

40 Pages Posted: 5 Apr 2018

See all articles by Davide Furceri

Davide Furceri

International Monetary Fund (IMF)

Prakash Loungani

International Monetary Fund (IMF)

Jun Ge

International Monetary Fund (IMF)

Giovanni Melina

International Monetary Fund (IMF)

Date Written: March 2018

Abstract

We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

Keywords: Fiscal policy, Fiscal shocks, Inequality, Income distribution

JEL Classification: E32, D84, F02, Q41, Q43, Q48

Suggested Citation

Furceri, Davide and Loungani, Prakash and Ge, Jun and Melina, Giovanni, The Distributional Effects of Government Spending Shocks in Developing Economies (March 2018). IMF Working Paper No. 18/57, Available at SSRN: https://ssrn.com/abstract=3157019

Davide Furceri (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

Jun Ge

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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