Fiscal Consolidation Programs and Income Inequality - discussion by Chima Simpson Bell
1. Fiscal Consolidation Programs and Income
Inequality
Brinca, Ferreira, Franco, Holter and Malafry (2017)
Discussion by Chima Simpson-Bell
European University Institute
November 17, 2017
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
2. An interesting way of looking at the relationship between
inequality and fiscal consolidation
A lot of focus on whether fiscal consolidation exacerbates
inequality: through removal of transfer payments, incidence of
unemployment
Ball, Furceri, Leigh and Loungani (2013)
Woo, Bova, Kinda and Zhang (2017)
The main mechanism remains very clear despite the
sophistication of the model
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
3. Paper Summary
Present new empirical evidence suggesting that income
inequality is a relevant variable in considering the impact of
fiscal consolidation programs
Introduce a life-cycle, overlapping generations model with
uninsurable labour income risk to account for this pattern
Identify mechanism: high income risk → higher precautionary
savings → fewer constrained agents → more elastic labour
supply
Calibrate this model to a panel of economies, reproduce
patterns in the data
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
4. Definitions of inequality
Empirical exercises: link drawn between inequality of gross
income and consolidation impact
Inequality measures: P90
P10
, Gini, etc.
Assertion: most important driver of inequality - idiosyncratic
labour income risk σu
Go back to data - infer from variance of wages that (for
example) Germany has relatively high σu
Cross country exercise relates variance of wages to fiscal
multiplier in the model
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
5. Definition of Inequality (2)
So we end up with three objects which we might call
inequality
1 Gross income ratio (EU-SILC)
2 Variance of log wages Var ln w (LIS survey)
3 Labour income risk σu (calibrated)
The paper shows the following relationships:
Income ratio (data) → fiscal multiplier (data)
Income risk (model) → fiscal multiplier (model)
Var ln w (data) → fiscal multiplier (model)
To complete the story we need the link
Income ratio ↔ income risk σu
Or directly income risk/log wage → fiscal multiplier (in the
data)
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
6. Comparing Var ln w and Gini
Germany and Czech Republic have
very different levels of wage
inequality
Used to assign σu of 0.439 and
0.145 respectively
These values, when used in the
model, result in a much higher
fiscal multiplier for Germany
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
7. Comparing Var ln w and Gini (2)
Germany and Czech Republic opposite ends of the scale in Var
ln w, but we don’t see this here
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
8. Minor comments
The mechanism is tested using household debt (-to-income
ratio), since in the model debt moves with proportion of
constrained agents
Debt-to-income is sometimes used as a measure of financial
vulnerability (e.g. ECB consumption survey), so the test of the
mechanism is more direct than it sounds
Why is the austerity program in the experiment so long?
Discussion by Chima Simpson-Bell European University Institute
Fiscal Consolidation Programs and Income Inequality
