The Effects of Income Distribution and Fiscal Policy on Aggregate Demand, Investment and the Budget Balance: The Case of Europe

DOI: 10.1093/cje/bez045

Posted: 31 Aug 2020

See all articles by Thomas Obst

Thomas Obst

University of Greenwich

Özlem Onaran

University of Greenwich

Maria Nikolaidi

University of Greenwich

Date Written: February 27, 2020

Abstract

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

Suggested Citation

Obst, Thomas and Onaran, Özlem and Nikolaidi, Maria, The Effects of Income Distribution and Fiscal Policy on Aggregate Demand, Investment and the Budget Balance: The Case of Europe (February 27, 2020). DOI: 10.1093/cje/bez045, Available at SSRN: https://ssrn.com/abstract=3658073

Thomas Obst

University of Greenwich

30 Park Row
Greenwich
London, SE10 9LS
United Kingdom

Özlem Onaran (Contact Author)

University of Greenwich

30 Park Row
Greenwich
London, SE10 9LS
United Kingdom

Maria Nikolaidi

University of Greenwich ( email )

30 Park Row
Greenwich
London, SE10 9LS
United Kingdom

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