Economic growth, inequality and fiscal policies: A survey of the macroeconomics literature

The relationship between economic growth and income inequality has attracted a great deal of attention in recent years. The growth experience of several countries during the last decades with different behaviors in terms of economic inequalities has generated a growing strand of theoretical and empirical literature trying to explain these events. Although one could argue that economic growth and inequality influence each other, it is also possible that different public policies could influence the relationship between both macro aggregates. Fiscal policy has traditionally been considered an effective instrument trough which to influence aggregate demand, the distribution of income and wealth, and the economy's capacity to produce goods and services. Therefore, a correct selection of the composition and combination of these policies has become of crucial importance for the purpose of achieving a broad-based stable path of economic growth across countries. Within this framework, this chapter reviews the evolution of economic literature that analyzes the relationship between growth and inequality. We perform a comparative analysis of different theoretical and empirical developments, with particular focus on the importance, in terms of size and composition, of different fiscal policies, explaining that relationship.