452 - Automatic Fiscal Stabilisers: What they are and what they do.
Jan in 't Veld (European Commission), Martin Larch (European Commission), Marieke Vandeweyer (Katholieke Universiteit Leuven)
Automatic Fiscal Stabilisers: What they are and what they do(358 kB)
This paper analysis the size and effectiveness of automatic fiscal stabilisers.
Summary for non-specialists(23 kB)
The global financial and economic crisis has revived the debate in the academic literature and in policy circles about the size and effectiveness of automatic fiscal stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilisers is crucial. While automatic stabilisers are a fairly established concept in the fiscal policy literature, there is still no consensus about their actual nature and their effectiveness. This paper shows that differences in opinion mirror a deeper disagreement over how the budget would look like without automatic stabilisers. This issue is addressed by defining two types of counterfactual budgets giving rise to two different interpretations about the nature of automatic stabilisation. Simulations with a structural model confirm that the degree of smoothing is conditional on how the counterfactual budget, i.e. the budget without automatic stabilisers, is defined.
(European Economy. Economic Papers. 452. April 2012.
Brussels. PDF. 24pp. Tab. Graph. Bibliogr. Free.)
|ISBN ISBN 978-92-79-22973-2 (online)||
JEL classification: H6, H30, E37, E62
Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.