The Distributional Effects of Government Spending Shocks in Developing Economies

By Davide Furceri, Jun Ge, Prakash Loungani, Giovanni Melina

March 14, 2018

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Davide Furceri, Jun Ge, Prakash Loungani, and Giovanni Melina. The Distributional Effects of Government Spending Shocks in Developing Economies, (USA: International Monetary Fund, 2018) accessed June 24, 2025

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

Subject: Expenditure, Income distribution, Income inequality, National accounts, Public investment spending, Total expenditures

Keywords: Fiscal policy, Fiscal shocks, Global, Government expenditure forecast, Government spending contraction, Government spending response, Government spending shock, Government-spending ratio, Growth shock, Income distribution, Income inequality, Inequality, Inequality multiplier, Net income inequality, Public investment spending, Sub-Saharan Africa, Total expenditures, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/057
Stock No:

WPIEA2018057
ISBN:

9781484345412
ISSN:

1018-5941

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