Are there inequality spillovers? Evidence through a modified inequality measure and European dynamics of inequality

Working Paper 2020-545

Abstract

This paper’s distinctive feature is a shift towards a novel definition of a measure of income inequality that provides a holistic understanding of income distribution supplemented with a specification through the reflection of governments’ redistributive role played by the means of provision of social transfers. Modified inequality indicator is constructed to gain more meaningful quantitative assessments in terms of inequality rankings and subsequently used to measure income inequality spillovers within the European space in order to achieve a better understanding of the variety of factors that influence developments in inequality. Another aspect is a novel multidimensional interdependency approach that matches physical, economic and social distances between European economies, aiming to model multifaceted interdependencies and account for their joint contribution to the changes in income inequality across the continent. We observe changes in inequality rankings of several European countries as there is a differentiated degree of response to social transfers within the sample. Our findings provide further evidence on the heterogeneous magnitude of responses to inequality and growth developments across European economies. Evidence has been provided that intra-EU inequalities have a pro-cyclical character, where the transmission of a change in Eurozone economic performances into the extent of income inequality is statistically significant. In terms of the dynamics between monetary policy and income distribution, our results suggest that the effects of monetary shocks on inequality are transmitted relatively rapidly, and often get amplified as they travel within the European region.

Authors: Deniz Sevinc, Edgar Mata Flores, Simon Collinson.