Cecilia García-Peñalosa is Chargée de Recherche at CNRS and GREQAM in Marseille, France and would like to acknowledge the support received from the Institut d'Economie Publique (IDEP). Stephen Turnovsky is Castor Professor at the University of Washington and his research was supported in part by the Castor endowment at the University of Washington. The paper has benefited from seminar presentations at the Central European University, Erasmus University, the University of California, Riverside, the University of Kansas, the University of Munich, and the University of Oregon. The constructive comments of two anonymous referees are also gratefully acknowledged.
Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?
Article first published online: 18 APR 2007
Journal of Money, Credit and Banking
Volume 39, Issue 2-3, pages 369–394, March–April 2007
How to Cite
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. doi: 10.1111/j.0022-2879.2007.00029.x
- Issue published online: 18 APR 2007
- Article first published online: 18 APR 2007
- Received January 24, 2005; and accepted in revised form December 20, 2005.
- endogenous growth;
- income inequality;
- fiscal policy
We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this context, the growth rate and the distribution of income are jointly determined. We then examine the distributional impact of different ways of financing an investment subsidy. Policies aimed at increasing the growth rate result in a more unequal distribution of pre-tax income, consistent with the positive correlation between income inequality and growth observed in the recent empirical literature. However, there is no conflict between efficiency and equity if inequality is measured in terms of the distribution of welfare.