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Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications

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  • Xavier Debrun

    ()
    (International Monetary Fund)

  • Radhicka Kapoor

    (London School of Economics)

Abstract

The paper revisits the empirical link between fiscal policy and macroeconomic stability. Our basic presumption is that by definition, the operation of automatic stabilizers should always and everywhere contribute to greater macroeconomic stability (output and consumption). However, two stylized facts seem at odds with that prediction. First, the moderating effect of automatic stabilizers appears to have weakened in advanced economies between the mid-1990s and 2006 (the end of our main sample). Second, automatic stabilizers do not seem to be effective in developing economies. Our analysis addresses these apparent puzzles by accounting for the government’s ambivalent role as a shock absorber and a shock inducer for determinants of macroeconomic volatility over time. Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers.

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Bibliographic Info

Article provided by Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas in its journal Revista de Economía y Estadística.

Volume (Year): XLVIII (2010)
Issue (Month): 2 (July)
Pages: 69–101

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Handle: RePEc:ief:reveye:v:48:y:2010:i:2:p:69-101

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Related research

Keywords: Economic stabilization; Fiscal policy; Fiscal stability.;

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References

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  1. Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 0077, European Central Bank.
  2. Helge Berger & Ulrich Woitek, 2005. "Does Conservatism Matter? A Time-Series Approach to Central Bank Behaviour," Economic Journal, Royal Economic Society, vol. 115(505), pages 745-766, 07.
  3. Roel Beetsma & Xavier Debrun & Frank Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CESifo Working Paper Series 599, CESifo Group Munich.
  4. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," IZA Discussion Papers 4310, Institute for the Study of Labor (IZA).
  5. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Levine's Bibliography 784828000000000465, UCLA Department of Economics.
  6. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 3-19, Summer.
  7. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.
  8. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  9. Xavier Debrun & David Hauner & Manmohan S. Kumar, 2009. "Independent Fiscal Agencies," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 44-81, 02.
  10. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responiveness, Persistence and Discretion," Working Papers Department of Economics 2008/50, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  11. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
  12. Andrés, Javier & Doménech, Rafael & Fatás, Antonio, 2004. "The Stabilizing Role of Government Size," CEPR Discussion Papers 4384, C.E.P.R. Discussion Papers.
  13. Christopher Crowe & Ellen E. Meade, 2007. "Central Bank Independence and Transparency: Evolution and Effectiveness," Working Papers 2007-20, American University, Department of Economics.
  14. Steven A. Symansky & Thomas Baunsgaard, 2009. "Automatic Fiscal Stabilizers," IMF Staff Position Notes 2009/23, International Monetary Fund.
  15. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults," IMF Working Papers 02/149, International Monetary Fund.
  16. Xavier Debrun & Jean Pisani-Ferry & André Sapir, 2008. "Government size and output volatility: should we forsake automatic stabilisation?," Working Papers 47, Bruegel.
  17. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
  18. Julia Darby & Jacques Melitz, 2008. "Social spending and automatic stabilizers in the OECD," Economic Policy, CEPR & CES & MSH, vol. 23, pages 715-756, October.
  19. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability," IMF Working Papers 10/111, International Monetary Fund.
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