Inequality and public debt: A positive analysis

This study extends the multi‐country, politico‐economic model of fiscal policy to incorporate wage inequality within each country. In this extended framework, we present conflict over fiscal policy within and across generations and show that a low‐inequality country realizes tight fiscal policy with low public debt accumulation, whereas a high‐inequality country experiences loose fiscal policy with high public debt. This model prediction is consistent with empirical evidence from OECD countries for the years 1980 to 2010.