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On government spending and income inequality under monopolistic competition

Published online by Cambridge University Press:  23 October 2023

Juin-Jen Chang
Affiliation:
Institute of Economics, Academia Sinica, Taipei City, Taiwan
Jang-Ting Guo*
Affiliation:
Department of Economics, University of California, Riverside, CA, USA
Wei-Neng Wang
Affiliation:
Department of International Business, National Taichung University of Science and Technology, Taichung City, Taiwan
*
Corresponding author: Jang-Ting Guo; Email: guojt@ucr.edu

Abstract

This paper systematically examines the theoretical and quantitative interrelations between government spending and disposable income inequality in a tractable monopolistically competitive Ramsey macroeconomy. Upon an increase in government size, we analytically show that whether the long-run after-tax Gini coefficient rises or falls depends on the sign and magnitude of the wealth/capital inequality effect versus those of the adjusted-labor effect. Under (i) a mild level of productive public expenditure externalities and (ii) a sufficiently high intertemporal elasticity of consumption substitution, our calibrated model is able to generate qualitatively as well as quantitatively consistent income inequality effects of government spending vis-à-vis recent estimation results.

Type
Articles
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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