Income inequality, tax base, and sovereign spreads
Joshua Aizenman, Yothin Jinjarak, 30 June 2012
Might income inequality make structural adjustments more difficult? This column presents data from 50 countries in 2007, in 2009, and in 2011, and finds that higher income inequality in the country is associated with a lower tax base, less fiscal space, and higher sovereign spreads.
The growing public debt in many nations has brought fiscal rebalancing to the top of policy agendas. This means raising taxes, or cutting expenditure. Recent US experience in the US and other nations suggest the presence of structural factors accounting for resistance to tax reforms.
One obstacle to tax changes may be polarised distribution of incomes.
Topics: Poverty and income inequality
Tags: income inequality, sovereign spreads, tax base
A tale of two divergences
Alberto Alesina, Daniel Nadler, 28 April 2012
The divergence in sovereign spreads across Eurozone members has been the object of much attention. This column looks at divergence across US states and finds that unexpected deficits are correlated with higher state bond yields across all states. This effect is larger for states with left-leaning political systems, suggesting that bond-market participants view political variables as relevant in assessing the risk characteristics of sub-sovereign bonds.
One of the casualties of the financial crisis has been the idea that the sovereign debt of industrial economies is safe. Everybody knows what happened in Europe, but something similar happened in the US as well.
Topics: Financial markets, International finance
Tags: Bonds spreads, sovereign spreads, US
How durable is the hard peg of the euro? Lessons from the classical gold standard
Kris James Mitchener , Marc Weidenmier, 30 June 2010
The Eurozone crisis has led some to seriously consider the prospect of a breakup of the euro. This column presents evidence from the classical gold standard era (1870-1913) suggesting that even then investors doubted the credibility of emerging market countries sticking to a hard currency peg – with higher premiums on sovereign debt as a result.
At the time of adoption of a single currency for much of Europe, many policymakers believed that exit from the euro would not only be politically difficult, but also undesirable in the sense that the new hard peg would confer greater benefits than costs.
Topics: Exchange rates
Tags: Eurozone crisis, Fiscal crisis, sovereign spreads