The Effect of Public Debt on Income Inequality in Advanced Economies: Does Institutional Quality Matter?

Abstract

Global income inequality becomes one of the severe problems in most economies, while government spending financed by public debt can be a good instrument of fiscal policy to reduce this inequality in society. Does institutional quality affect the public debt -income inequality relationship in advanced economies? For the answer, the paper employs the system-GMM and PMG estimator to examine the effects of public debt, institutional quality, and their interaction on income inequality for a group of 30 advanced economies from 2002 through 2020. The paper finds some exciting results. Public debt and institutional quality narrow income inequality, but their interaction term widens. Furthermore, economic growth and unemployment increase income inequality, while education decreases it. The findings suggest some necessary policy implications to narrow income inequality through public debt and institutional quality.