Media Briefings


  • Published Date: February 2013

A ‘Robin Hood’-style redistribution policy, which takes money from the rich and gives it to the poor, can boost consumption and output, although at the cost of higher inflation. So too can an increase in public debt that is used to transfer resources to everyone.

These are among the conclusions of research by Florin Bilbiie, Tommaso Monacelli and Roberto Perotti, published in the February 2013 issue of the Economic Journal. One of the key insights of their study is that public debt is equivalent to redistribution.

What happens if the government redistributes money from the rich to the poor? And what happens if, instead, the government gives a transfer to everybody, but finances it by borrowing money from the rich (that is, by issuing public debt)?

These questions figure prominently in current debates for two reasons. Because in many developed economies, the level of inequality is perceived to be ‘too high’; but also because commentators dispute whether redistributive policies might be an effective way to jump-start the economy in the current crisis.

This study argues that both a Robin Hood policy and an increase in public debt (used to transfer resources to everyone) can expand the aggregate level of consumption and output, although at the cost of higher inflation.

In this setting, the rich and the poor correspond, respectively, to people who hold assets (because they are intrinsically patient savers) and people who borrow (because they are impatient to consume), but only up to some limit.

The story is as follows. Consider, first, the Robin Hood case – that is, a transfer from the rich to the poor. Because the latter are impatient to consume (and are up against a borrowing constraint), they will spend any additional income to buy more goods. Firms react to the increased demand for their products partly by increasing prices (higher inflation) and partly by hiring more workers.

In turn, this leads to an increase in the price of labour – that is, the real wage – which amplifies the expansionary effect on the poor (they earn more, so they spend more). Importantly, the poor need not work more to produce this additional output.

The rich, however, ‘feel poorer’ because they hold the shares of the firms, and have to pay the poor to induce them to work. Since the rich feel poorer, they will work more and therefore produce more output.

As a rough numerical approximation, redistributing one unit of consumption/output from the rich to the poor hence creates between 0.4 to 0.6 units of aggregate consumption/output (for a range of the share of poor in the population going from 0.3 to 0.35, which corresponds to some empirical estimates).

Consider now an alternative scenario, in which the government cut taxes for everyone, and finances it by issuing public debt. The study highlights that an increase in public debt (held only by the rich) amounts to a particular type of redistribution: from the rich to the poor today, and from the poor to the rich tomorrow, when debt needs to be repaid.

If redistribution occurs via public debt, it generates an economic boom followed by a contraction. But the two effects are not symmetric: the former is larger than the latter, and hence the tax cut is ultimately expansionary on economic activity.

The reason for this asymmetry lies in the behaviour of the real interest rate, which measures the opportunity cost of consuming today rather than in the future. The de facto transfer from the poor to the rich tomorrow generates a fall in the demand for goods and therefore future deflation (that is, falling prices). Anticipating future deflation, the central bank lowers the interest rate, which boosts consumption of the rich today.

It is interesting to notice that if public debt is repaid far into the future through permanently higher future taxes, the effect of a uniform tax cut is identical to that of a Robin Hood policy. This is an extreme illustration of one of the key insights of this study: that public debt is, in fact, redistribution.


Notes for editors: ‘Public Debt and Redistribution with Borrowing Constraints’ by Florin Bilbiie, Tommaso Monacelli and Roberto Perotti is published in the February 2013 issue of the Economic Journal.

Florin Bilbiie is at the Paris School of Economics. Tommaso Monacelli and Roberto Perotti are at Bocconi University in Milan.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email:; or Florin Bilbiie via email: