The moderating effect of income inequality in fiscal policy efficiency: The case of Central and Eastern Europe

Abstract One of the objectives of fiscal policy is to ensure a fair income distribution. In the literature there is no consensus on the income inequality – fiscal policy nexus. Unlike previous studies, this paper contributes to the literature by quantifying the moderating effect of income inequality in total tax revenues and gross national expenditures which are defined as fiscal policy tools. With the help of two moderator variables (income inequality*total tax revenues, and income inequality*gross national expenditures), the impact of income inequality and fiscal policy tools on economic growth are tested for 20 Central and Eastern European (CEE) countries from 1990 to 2019. Diagnostic tests are also carried out on the series before long-term relationships are determined. Our analysis finds that the inequality-growth relationship is negative, the moderator variable defined as income inequality * total tax revenues decreases the strength of the relationship, and the moderator variable defined as income inequality * gross national expenditures increases the strength of the relationship.