National debt and income inequality

Abstract

This study examines the relationship between national debt levels and income inequality in an economy. With no a priori specification on the direction of causality, the role of either variable in influencing the other is analysed. The study makes use of panel data from 34 countries of different geographical regions and development status, over the period running from 1980 to 2010. Analysis of data is done by means of country fixed effects panel regressions. Including control variables such as government expenditure, real GDP growth and inflation, the findings indicate a significant positive influence of income inequality on debt levels, with the exception of European and Developed countries. Similarly, the levels of national debt are found to positively and significantly impact the degree of heterogeneity in the distribution of incomes. These results, therefore, bring to question the appropriateness of using excessive government expenditure to remedy for income inequality.