Fiscal pact and inequality in Mexico: evidence from a Bayesian Panel VAR

Abstract

Fiscal policy is a key instrument used to foster macroeconomic stability and promote economic growth. However, in the context of Mexico—an economy marked by profound structural inequalities—the uniform effectiveness of fiscal measures is not guaranteed. This study investigates the heterogeneous effects of Mexico’s fiscal pact on income deciles and its implications for overall inequality. Using a Bayesian Panel Vector Autoregression (PVAR) model and data from the National Survey of Occupation and Employment (ENOE) spanning 2005 to 2024, we estimate the distributional impact of fiscal transfers. Our results show that shocks to Ramo 28—unconditional transfers from the federal government to the states—have a statistically significant and inequality-reducing effect. In contrast, shocks to Ramo 33—earmarked transfers primarily allocated to health, education, and security—do not exhibit a meaningful impact on inequality levels. Furthermore, increases in government revenue and economic productivity are also associated with reductions in inequality. These findings highlight the potential of fiscal policy to promote more equitable growth, while also underscoring the relative inefficiency of targeted transfers (Ramo 33) compared to general-purpose transfers (Ramo 28), revenue expansion, and productivity improvements.