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ASSESSING WELFARE IMPACTS OF SOME DEBT-CONSOLIDATION EPISODES IN THE EUROPEAN UNION

Published online by Cambridge University Press:  06 January 2016

Miguel Viegas  and
Ana Paula Ribeiro
Miguel Viegas*
Affiliation:
GOVCOPP, DEGEI, Universidade de Aveiro
Ana Paula Ribeiro
Affiliation:
CEF.UP and Universidade do Porto
*
Address correspondence to: Miguel Viegas, GOVCOPP, DEGEI, Universidade de Aveiro, Campus Universitario de Santiago, 3810-193 Aveiro, Portugal; e-mail: [email protected].
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Abstract

This paper aims at characterizing the debt-consolidation processes put forward by some European countries in order to assess welfare and, in particular, the inequality effects involved. For this purpose, we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy variables and the endogenous cross-section distribution of income and wealth. Using a utilitarian welfare criterion, results show that different strategies yield different outcomes. Despite the positive welfare gains observed, transition costs affect all episodes and are determinant in sorting among the welfare-enhancing strategies. Our results confirm the superiority of adjustments partially based on the reduction of unproductive expenditures over those based on tax raises or on the reduction of social transfer. Welfare is further enhanced when consolidation strategies involve an equilibrated mix between expenditure and transfer cuts and tax increases, because debt consolidation processes mostly or exclusively based on social transfers cuts have a strong negative effect on welfare inequality. Moreover, shock volatility and persistency (also shaping inequality) help explain different results across countries: under high income inequality, consolidation processes are expected to yield smaller inequality effects on welfare, whereas a worse consumption–leisure trade-off may arise.

Keywords

Fiscal Consolidation DynamicsEuropean UnionHeterogeneous-Agent ModelInequalityWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1146 - 1173
Copyright
Copyright © Cambridge University Press 2016 

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