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Theoretical and Applied Economics
No. 1 / 2021 (626), Spring

Fiscal policy and growth-inequality tradeoffs: Bayesian evidence from Cote d’Ivoire

Kouassi YEBOUA
African Futures and Innovation program Institute for Security Studies, Pretoria, South Africa

Abstract. The growing within-country income inequality has brought to the forefront of the economic policy agenda the question of the role of fiscal policy in income redistribution. However, there may be a tradeoff between the objectives of addressing income inequality and promoting economic growth vis-à-vis fiscal policies. This study investigates the potential growth-inequality tradeoffs in the design of fiscal policy in Cote d’Ivoire. Using a Bayesian VAR framework which is more suitable to deal with possible issues that may appear in small data sample, the results show that a positive shock in government current expenditure undermine economic growth but reduce income inequality. Also, we find that public investment and direct taxes promote growth and reduce income inequality while indirect taxes decelerate growth with a marginal effect on income inequality. Overall, our findings reveal that government current expenditure is the fiscal policy instrument that generates growth-inequality tradeoff in Cote d’Ivoire.

Keywords: fiscal policy, income inequality, economic growth, Bayesian VAR, Cote d’Ivoire.

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