economy model with income inequality, social transfers, and default risk to rationalize this fact. Without default risk … transfers are countercyclical, inequality is procyclical, and external debt is used to smooth distortionary taxation. With … become procyclical and inequality worsens during times when risk premia are high. We confirm the predictions of the model in …

with significant differences between countries. At the same time, fiscal measures closed around 60% of the inequality gap …