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Fiscal consolidations and distributional effects: which form of fiscal austerity is least harmful?
journal contribution
posted on 2019-09-16, 12:59 authored by Richard McManus, Gulcin Ozkan, Dawid TrzeciakiewiczDawid TrzeciakiewiczDistributional consequences of fiscal austerity, while being increasingly recognised in the policy debate, have received little attention in the existing formal work. This paper proposes a medium scale New-Keynesian DSGE model incorporating an appropriate dimension of household heterogeneity and a well-specified fiscal structure, allowing for a comprehensive analysis of losers and winners from austerity. We find that cutting transfers and public employment and raising labour income taxes are the most regressive forms of austerity, greatly raising income inequality. In contrast, raising capital income taxes is progressive - the only such policy in our analysis - with also the smallest output losses in the short-run. Second, the speed of austerity emerges as a potential tool in fiscal adjustment. Indeed, speedy austerity yields worst distributive and output effects irrespective of its composition. Finally, fiscal consolidation is particularly damaging in downturns where distributional effects are substantially more unfavourable than in normal times.
History
School
- Business and Economics
Department
- Economics
Published in
Oxford Economic PapersVolume
73Issue
1Pages
317-349Publisher
Oxford University Press (OUP)Version
- AM (Accepted Manuscript)
Rights holder
© Oxford University PressPublisher statement
This is a pre-copyedited, author-produced version of an article accepted for publication in Oxford Economic Papers following peer review. The version of record Richard McManus, F Gulcin Ozkan, Dawid Trzeciakiewicz, Fiscal consolidations and distributional effects: which form of fiscal austerity is least harmful?, Oxford Economic Papers, 73(1) pp. 317–349, https://doi.org/10.1093/oep/gpz065 is available online at: https://doi.org/10.1093/oep/gpz065.Acceptance date
2019-07-23Publication date
2019-11-04Copyright date
2021ISSN
0030-7653eISSN
1464-3812Publisher version
Language
- en