FROM FISCAL POLICY TO INCOME INEQUALITY IN ADVANCED ECONOMIES: DOES INSTITUTIONAL QUALITY HINDER?

Governments use fiscal policy to correct market failures and reallocate national income, so fiscal policy can narrow income inequality in society. Does institutional quality matter for the fiscal policy - income inequality relationship in advanced economies? For the answer, the paper investigates the impacts of fiscal policy, institutional quality and their interaction on income inequality for a balanced panel dataset of 30 advanced economies from 2002 to 2020. It applies the system-GMM Arellano-Bond estimators for estimation. Then, it uses the PMG estimator to test the robustness. The results show that fiscal policy and institutional quality narrow income inequality, but their interaction widens. It seems counter-intuitive. In addition, economic growth and unemployment increase income inequality. The findings suggest some implications for improving institutional quality and using fiscal policy to reduce income inequality in the advanced economies.