Essays on income inequality, financial crises, and fiscal policy
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Date
2024
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Abstract
Income inequality is an important issue in the world. Understanding its causes and effects is paramount for better policy making. The effect studied in this dissertation is that of the financial crisis, in particular bank runs, as they are particularly harmful for the economy. The causes are focused on fiscal policy, particularly expenditure and tax consolidations, where a credit channel can foster inequality while the capital accumulation tends to reduce it.In the first chapter, I propose a banking model that provides a rationale for why increasing income inequality correlates with financial crises by looking at the probability of bank runs, which are recognized as triggers for financial crises. The canonical model of bank runs of Diamond & Dybvig (1983) is extended to accommodate heterogeneity in endowment levels between two groups of agents by having a mean-preserving distribution of endowments between groups. In equilibrium, the likelihood of a bank run increases with income inequality. I corroborate this finding by analyzing data for 17 countries between 1880 and 2013, where I find that even accounting for macroeconomic variables, an increased probability of a bank run is correlated with an increase in the income share held by the top percentiles of the income distribution.The second chapter examines fiscal consolidations’ impacts on income inequality in advanced and emerging economies. Using data from 31 countries (1980-2016), it employs local projections to analyze how expenditure and tax consolidations affect income distribution. The findings indicate that fiscal consolidations typically increase income inequality, benefiting the top 1% at the bottom 50% and the middle 40% expense. Credit access is a mechanism that amplifies these effects, with more pronounced inequality in advancedeconomies and nuanced impacts in emerging ones. Capital accumulation counteracts the impact of fiscal consolidations on income inequality, especially for emerging economies after a tax consolidation.
Description
Tesis (Doctor of Philosophy in Economics)--Pontificia Universidad Católica de Chile, 2024
Keywords
Bank runs, IncomeInequality, Financial crisis, Income inequality, Fiscal policy, Credit constraints, Capital accumulation, Advanced economies, Emerging economies