Exploring the Fiscal policy—income inequality relationship with Bayesian model averaging analysis
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Date
2024
Authors
Musibau, H.O.
Zakari, A.
Taghizadeh-Hesary, F.
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Economic Change and Restructuring: an international journal devoted to the study of comparative economics, planning and development, 2024; 57(2):21-1-21-13
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Hammed Oluwaseyi Musibau, Abdulrasheed Zakari, Farhad Taghizadeh-Hesary.
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The authors have employed several techniques to account for model uncertainty in the inequality-growth model. However, the BMA technique is the most prominent approach that solves model uncertainty in the inequality-growth literature. This study applied a recent BMA analysis using panel data to examine the role of fiscal policy on income inequality in 37 OECD countries from 2000 to 2015. Fiscal policy (in terms of tax revenue increase) serves as a redistributive tool or instrument to transfer income from higher income earners to lower earners and is considered a mechanism for income equality. To the best of the author’s knowledge, only a few empirical growth studies have considered fiscal policy impact in their income inequality model setup. Our work contributes to very little research on the fiscal policy– income nexus using a novel BMA and MCMC regression as a robust methodology. Our empirical evidence on the role of fiscal policy on income inequality has found three variables, namely, economic growth, fiscal policy, and urban population, to impact income inequality significantly. We also found that the countries are conditionally neither converging nor diverging because of the probability of their coefficient being high at 100%. As expected, the coefficient of fiscal policy has a significant negative relationship with income inequality, indicating that fiscal policy reduces income inequality significantly by an average of 22% (with 100% certainty) for both BMA and Bayes models in OECD countries.
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© The Author(s) 2024. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http:// creativecommons.org/licenses/by/4.0/.