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Is there a Role for an Active Fiscal Stabilization Policy?

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Author Info
Torben Andersen ()
Abstract

This paper discusses the need and scope for an active fiscal stabilization policy. It is argued that the effectiveness of fiscal policy as a short run stabilizer does not depend on the long run multipliers of (balanced budget) fiscal policies. To the extent that activity can be affected by aggregate demand in the short run, there is a case for a fiscal stabilization policy in terms of temporary variations in taxes or public consumption contingent on the state of the economy. The effectiveness of fiscal policy is supported by empirical evidence. However, an appropriate policy intervention depends both on the nature of the shock and the structure of the economy. There are thus fundamental information problems in pursuing discretionary fiscal policies on top of political economy concerns, and fiscal fine-tuning is not to be recommended. Automatic stabilizers do not to the same extent suffer from these problems, but their strength is not by design but the net result of other policy considerations. Hence, there is a need to consider the structure and size of automatic stabilizers.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1447.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1447

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Related research
Keywords: shocks; insurance; adjustment failures; rules; discretion and fiscal policy;

Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas Beissinger, 2006. "Neue Anforderungen an eine gesamtwirtschaftliche Stabilisierung," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 277/2006, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  2. Francesco Furlanetto & Martin Seneca, 2007. "Rule-of-thumb consumers, productivity and hours," Working Paper 2007/05, Norges Bank. [Downloadable!]
  3. Gösta Ljungman, 2008. "Expenditure Ceilings - A Survey," IMF Working Papers 08/282, International Monetary Fund. [Downloadable!]
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