Hostname: page-component-76fb5796d-22dnz Total loading time: 0 Render date: 2024-04-25T16:41:52.924Z Has data issue: false hasContentIssue false
  • English
  • Français

ASSESSING WELFARE IMPACTS OF SOME DEBT-CONSOLIDATION EPISODES IN THE EUROPEAN UNION

Published online by Cambridge University Press:  06 January 2016

Miguel Viegas  and
Ana Paula Ribeiro
Miguel Viegas*
Affiliation:
GOVCOPP, DEGEI, Universidade de Aveiro
Ana Paula Ribeiro
Affiliation:
CEF.UP and Universidade do Porto
*
Address correspondence to: Miguel Viegas, GOVCOPP, DEGEI, Universidade de Aveiro, Campus Universitario de Santiago, 3810-193 Aveiro, Portugal; e-mail: mlbv@ua.pt.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper aims at characterizing the debt-consolidation processes put forward by some European countries in order to assess welfare and, in particular, the inequality effects involved. For this purpose, we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy variables and the endogenous cross-section distribution of income and wealth. Using a utilitarian welfare criterion, results show that different strategies yield different outcomes. Despite the positive welfare gains observed, transition costs affect all episodes and are determinant in sorting among the welfare-enhancing strategies. Our results confirm the superiority of adjustments partially based on the reduction of unproductive expenditures over those based on tax raises or on the reduction of social transfer. Welfare is further enhanced when consolidation strategies involve an equilibrated mix between expenditure and transfer cuts and tax increases, because debt consolidation processes mostly or exclusively based on social transfers cuts have a strong negative effect on welfare inequality. Moreover, shock volatility and persistency (also shaping inequality) help explain different results across countries: under high income inequality, consolidation processes are expected to yield smaller inequality effects on welfare, whereas a worse consumption–leisure trade-off may arise.

Keywords

Fiscal Consolidation DynamicsEuropean UnionHeterogeneous-Agent ModelInequalityWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1146 - 1173
Copyright
Copyright © Cambridge University Press 2016 

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

Afonso, A. and St.Aubyn, M. (2009) Macroeconomic rates of return of public and private investment: Crowding-in and crowding-out effects. Manchester School 77 (S1), 21–39.CrossRefGoogle Scholar
Aiyagari, S. (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109 (3), 659–684.Google Scholar
Aiyagari, S. (1995) Optimal capital taxation with incomplete markets, borrowing constraints, and constant discounting. Journal of Political Economy 103 (6), 1158–1175.Google Scholar
Aiyagari, S.R. and McGrattan, E. (1998) The optimum quantity of debt. Journal of Monetary Economics 42 (3), 447–469.Google Scholar
Alesina, A. and Perotti, R. (1995) Fiscal expansions and fiscal adjustments in OECD countries. Economic Policy 21, 205–248.Google Scholar
Argimón, I., Gómez, A.L., de Cos, P.H., and Martí, F. (1999) El Sector de las Administraciones Públicas en Espana. Estudios Económicos, Servicio de Estudios del Banco de España, 68.Google Scholar
Auerbach, A. and Kotlikoff, L. (1987) Dynamic Fiscal Policy. New York: Cambridge University Press.Google Scholar
Auschauer, D.A. (1989) Is public expenditure productive? Journal of Monetary Economics 23 (2), 177–200.Google Scholar
Barro, R. (1973) The control of politicians: An economic model. Public Choice 14 (1), 19–42.Google Scholar
Barro, R.J. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy 98 (5, Part 2), S103–S125.Google Scholar
Bewley, T. (1983) A dififculty with the optimum quantity of money. Econometrica 51 (5), 1485–1504.Google Scholar
Blundell, R. and Etheridge, B. (2010) Consumption, income and earnings inequality in Britain. Review of Economic Dynamics 13 (1), 76–102.Google Scholar
Calmfors, L. (2010) The Swedish Fiscal Policy Council: Experiences and Lessons. Paper for Conference on Independent Fiscal Policy Institutions, Budapest, 18–19 March.CrossRefGoogle Scholar
Corsetti, G., Meier, A., and Müller, G.J. (2012) What determines government spending multipliers? Economic Policy 27 (72), 521–565.Google Scholar
Domanech, R. and Garcia, J.R. (2002) Optimal taxation and public expenditure in a model of endogenous growth. The B.E. Journal of Macroeconomics 2 (1), 3.Google Scholar
Domeij, D. and Floden, M. (2010) Inequality trends in Sweden 1978–2004. Review of Economic Dynamics 13 (1), 179–208.Google Scholar
European Commission (2000) Public Finances in EMU. European Economy N3/2000, European Commission, Brussels.Google Scholar
European Commission (2007) Public Finances in EMU. European Economy N3/2007, European Commission, Brussels.Google Scholar
European Commission (2009) General Government Data: General Government Revenue, Expenditure, Balance and Gross Debt. European Commission: Directorate General ECFIN Economic and Financial Affairs, Brussels.Google Scholar
Fernandez, F.C. (2005) Una Evaluacion Macroeconométrica de la Política Fiscal en España. Estudios Economicos 76, Servicios de Estudios del Banco del España.Google Scholar
Finn, M.G. (1998). Cyclical effects of governments employment and goods purchases. International Economic Review 39 (3), 635–57.Google Scholar
Floden, M. (2001) The effectiveness of government debt and transfers as insurance. Journal of Monetary Economics 48 (1), 81–108.Google Scholar
Floden, M. (2003) Public saving and policy coordination in aging economies. Scandinavian Journal of Economics 105 (3), 379–400.Google Scholar
Ganelli, G. and Tervala, J. (2010) Public infrastructures, public consumption, and welfare in a new-open-economy-macro model. Journal of Macroeconomics 32 (3), 827–837.Google Scholar
Huggett, M. (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Control 17 (5-6), 953–969.Google Scholar
Imrohoroglu, A. (1989) Cost of business cycles with indivisibilities and liquidity constraints. Journal of Political Economy 97 (6), 1364–1383.Google Scholar
Krueger, D., Perri, F., Pistaferri, L., and Violante, G.L. (2010) Cross sectional facts for macroeconomists. Review of Economic Dynamics 13 (1), 1–14.Google Scholar
Krusell, P. and Smith, A. (1998) Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106 (5), 867–896.Google Scholar
Lane, P. and Milesi-Ferretti, G. (2006) The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004. IMF working paper, 06/69.Google Scholar
Ljungqvist, L. and Sargent, T. (2004) Recursive Macroeconomic Theory. Cambridge, MA: MIT Press.Google Scholar
Mendoza, E.G., Quadrini, V., and Rios-Rull, V. (2009) Financial integration, financial development, and global imbalances. Journal of Political Economy 117 (3), 371–416.Google Scholar
Ni, S. (1995) An empirical analysis on the substitutability between private consumption and government purchases. Journal of Monetary Economics 36 (3), 593–605.Google Scholar
Pijoan-Mas, J. and V., Sanchez-Marcos (2010) Spain is different: Falling trends of inequality. Review of Economic Dynamics 13 (1), 154–178.Google Scholar
Rios-Rull, J. (1999) Computation of equilibria in heterogenous agent models. In Marimon, Ramon and Scott, Andrew (eds.), Computational Methods for the Study of Dynamic Economies: An Introduction, pp. 238–264. Oxford, UK: Oxford University Press.Google Scholar
Rios-Rull, J., Castaneda, A., and Diaz-Gimenez, J. (2003) Accounting for earnings and wealth inequality. Journal of Political Economy 111 (4), 818–857.Google Scholar
Tauchen, G. (1986) Statistical properties of generalized method-of-moments estimators of structural parameters obtained from financial market data. Journal of Business and Economic Statistics, American Statistical Association 4 (4), 397–416.Google Scholar
Turnovsky, S.J. and Fisher, W.H. (1995) The composition of government expenditure and its consequences for macroeconomic performance. Journal of Economic Dynamics and Control 19, 747–786.Google Scholar
Viegas, M. and Ribeiro, A.P. (2013a) The Dutch experience: Assessing the welfare impacts of two consolidation strategies using a heterogeneous-agent framework. Economic Modelling 32 (C), 351–360.Google Scholar
Viegas, M. and Ribeiro, A.P. (2013b) Welfare-improving government behaviour and inequality in a heterogeneous agent model. Journal of Macroeconomics 37, 146–160.Google Scholar