The Effects of Income Distribution and Fiscal Policy on Aggregate Demand, Investment and the Budget Balance: The Case of Europe
Posted: 31 Aug 2020
Date Written: February 27, 2020
This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometric-ally the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in EU15 countries. The results show that a simultaneous increase in the wage share in all EU15 countries would increase demand and the primary budget balance in all countries. A simultaneous increase in government spending turns out to boost economic activity in all the EU15 countries, indicating the positive economic effects of expansionary fiscal policy. Moreover, a progressive tax policy that would be implemented simultaneously at the EU level would lead to an increase in output in all countries.
Keywords: Wage Share, Fiscal Multiplier, Demand Regime, Fiscal Policy
JEL Classification: E12, E25, E62
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