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Automatic Fiscal Stabilisers: What They Are and What They Do

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  • Jan Veld

    ()

  • Martin Larch

    ()

  • Marieke Vandeweyer

    ()

Abstract

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. Copyright European Union 2013

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 1 (February)
Pages: 147-163

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Handle: RePEc:kap:openec:v:24:y:2013:i:1:p:147-163

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Automatic stabilisers; Budget balance; Output smoothing; Model simulation; H6; H30; E37; E62;

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References

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  1. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responsiveness, Persistence, and Discretion," OECD Economics Department Working Papers 659, OECD Publishing.
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  15. repec:ese:emodwp:em2-10 is not listed on IDEAS
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Cited by:
  1. Guido Baldi & Karsten Staehr, 2013. "The European debt crisis and fiscal reaction functions in Europe 2000–2012," Bank of Estonia Working Papers wp2013-5, Bank of Estonia, revised 24 Jul 2013.
  2. Balleer, Almut & Gehrke, Britta & Lechthaler, Wolfgang & Merkl, Christian, 2013. "Does Short-Time Work Save Jobs? A Business Cycle Analysis," IZA Discussion Papers 7475, Institute for the Study of Labor (IZA).

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