Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-14T07:27:04.574Z Has data issue: false hasContentIssue false
  • English
  • Français

ALTERNATIVE GOVERNMENT SPENDING RULES: EFFECTS ON INCOME INEQUALITY AND WELFARE

Published online by Cambridge University Press:  08 October 2012

G. C. Lim  and
Paul D. McNelis
G. C. Lim*
Affiliation:
University of Melbourne
Paul D. McNelis
Affiliation:
Fordham University
*
Address correspondence to: G. C. Lim, Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Victoria 3010, Australia; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper compares the effects of pro- and countercyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade, and export demand. The simulated results show that welfare and income inequality indices can move in opposite directions for government spending rules, with countercyclical spending improving welfare and procyclical spending improving income equality.

Keywords

Cyclical Fiscal PolicyIncome InequalityEconomic Welfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 7 , October 2013 , pp. 1496 - 1518
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alesina, A., Hausmann, R., Hommes, P., and Stein, E. (1999) Budget institutions and institutional performance in Latin America. Journal of Development Economics 59, 253–273.CrossRefGoogle Scholar
An, S., Chang, Y., and Kim, S. (2009) Can a representative-agent model represent a heterogeneous-agent economy? American Economic Journal: Macroeconomics 1 (2), 24–59.Google Scholar
Atkinson, A.B. (1970) On the measurement of inequality. Journal of Economic Theory 2, 244–263.CrossRefGoogle Scholar
Battaglini, M. and Coate, S. (2007) Political Economy of Fiscal Policy. Working paper, Department of Economics, Princeton University.Google Scholar
Calvo, G. (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Canova, F. and Paustian, M. (2010) Measurement with Some Theory: A New Approach to Evaluate Business Cycle Models. Manuscript, Department of Economics, University of Pompeu Fabra.Google Scholar
Chatterjee, S. and Turnovsky, S.J. (2010) The Distributional Consequences of Government Spending. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100163.Google Scholar
Correia, I.H. (1999) On the efficiency and equity trade-off. Journal of Monetary Economics 44, 581–603.CrossRefGoogle Scholar
Deaton, A. (1997) Analysis of Household Surveys: A Microeconometric Approach to Development Policy. Baltimore, MD: Johns Hopkins University Press.CrossRefGoogle Scholar
Dixit, A.K. and Stiglitz, J.E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297–308.Google Scholar
Eichengreen, B. and Hausmann, R. (1999) Exchange Rates and Financial Fragility. Working paper 7418, National Bureau of Economic Research.CrossRefGoogle Scholar
Galí, J., López-Salido, J., and Vallés, J. (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5227–5270.CrossRefGoogle Scholar
García-Peñalosa, C. and Turnovsky, S.J. (2007) Growth, income inequality and fiscal policy: What are the relevant trade-offs? Journal of Money, Credit and Banking 39, 369–394.CrossRefGoogle Scholar
Gorman, W.M. (1961) On a class of preference fields. Metroeconomica 13, 53–56.Google Scholar
Greenwood, J., Hercowitz, Z., and Huffman, G. (1988) Investment, capacity utilization and the real business cycles. American Economic Review 78, 402–417.Google Scholar
Heathcote, J. (2005) Fiscal policy with heterogeneous agents and incomplete markets. Review of Economic Studies 72, 161–188.CrossRefGoogle Scholar
Heathcote, J., Storesletten, K., and Violante, G. (2009) Quantitative Macroeconomics with Heterogeneous Households. Working paper 14768, National Bureau of Economic Research.CrossRefGoogle Scholar
Hendry, S., Ho, W.M., and Moran, K. (2003) Simple Monetary Policy Rules in an Open-Economy, Limited-Participation Model. Working paper 2003-38, Bank of Canada.Google Scholar
Ilzetski, E. and Végh, C.A. (2008) Procyclical Fiscal Policy in Developing Countries: Truth or Fiction? Working paper, Department of Economics, University of Maryland.CrossRefGoogle Scholar
Juillard, M. (1996) Dynare: A Program for the Resolution and Simulation of Dynamic Models with Forward Variables through the Use of a Relaxation Algorithm. Couverture Orange 9602, CEPREMAP.Google Scholar
Kumhof, M. and Laxton, D. (2009) Simple Implementable Fiscal Policy Rules. Working paper, IMF.CrossRefGoogle Scholar
Lahiri, A., Singh, R., and Végh, C. (2006) Optimal Exchange Rate Regimes: Turning Mundell–Fleming's Dictum on Its Head. Working paper 12684, National Bureau of Economic Research.CrossRefGoogle Scholar
Lane, P. (2003) The cyclicality of fiscal policy: Evidence from the OECD. Journal of Public Economics 87, 2661–2675.CrossRefGoogle Scholar
Lane, P. and Tornel, A. (1998) Why aren't savings in Latin America procyclical. Journal of Development Economics 57, 185–199.CrossRefGoogle Scholar
Lim, G.C. and McNelis, P.D. (2008) Computational Macroeconomics for the Open Economies. Cambridge, MA: MIT Press.Google Scholar
Rabanal, P. and Salido, J. (2006) Government Spending and Consumption-Hours Preferences. Working paper 02/2006, La Caixa.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open-economy models. Journal of International Economics 61, 163–185.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2004) Optimal, simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54 (6)1702–1725.Google Scholar
Smets, F. and Wouters, R. (2002) Openness, imperfect exchange rate pass-through, and monetary policy. Journal of Monetary Economics 49, 947–981.CrossRefGoogle Scholar
Talvi, E. and Vegh, C. (1996) Can Optimal Fiscal Policy Be Procyclical? Working paper, Office of the Chief Economist, Interamerican Development Bank.Google Scholar
Tekin-Bouza, S. and Turnovsky, S. (in press) The distributional consequences of foreign transfers: Do they reduce or exacerbate inequality? Oxford Economic Papers.Google Scholar
Thornton, J. (2008) Explaining procyclical fiscal policy in African countries. Journal of African Economies 17, 451–464.CrossRefGoogle Scholar
Turnovsky, S.J. and García-Peñalosa, C. (2008) Distributional dynamics in a neoclassical growth model: The role of elastic labor supply. Journal of Economic Dynamics and Control 32, 1399–1431.CrossRefGoogle Scholar