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Government size and output volatility: should we forsake automatic stabilization?

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Author Info

  • Xavier Debrun
  • Jean Pisani-Ferry
  • Andr� Sapir

Abstract

Prior to the launch of the euro, academics and policymakers were concerned that the loss of the monetary policy instrument would deprive participating countries of a vital tool to respond to country-specific economic shocks. This concern was rooted in the generally accepted proposition that market-based adjustment channels-i.e. labour mobility and capital flows-tended to be weaker among euro area countries than among regions of existing monetary unions such as the United States. Automatic stabilizers had long been regarded as playing a key role in macroeconomic stabilization. In particular, they were generally considered as having contributed significantly to the decrease of output volatility witnessed in Europe and in the United States after World War II, when the size of governments increased substantially on both sides of the Atlantic. Hence it was hoped that improved national fiscal policy could partly make up for the loss of monetary policy in stabilizing national macroeconomic conditions. The aim of the paper is to discuss this issue in the light of recent experience.

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File URL: http://ec.europa.eu/economy_finance/publications/publication12383_en.pdf
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 316.

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Length: 72 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:euf:ecopap:0316

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Related research

Keywords: fiscal policy; macroeconomic stabilisation; automatic stabilisers;

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Cited by:
  1. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.
  2. Facundo Albornoz & Joan Esteban & Paolo Vanin, 2009. "Government Information Transparency," Discussion Papers 09-03, Department of Economics, University of Birmingham.
  3. Biroli, Pietro & Buti, Marco & Turrini, Alessandro Antonio & Van Den Noord, Paul, 2008. "Defying the 'Juncker Curse’: Can Reformist Governments Be Re-elected?," CEPR Discussion Papers 6875, C.E.P.R. Discussion Papers.
  4. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.
  5. Péter Halmai & Viktória Vásáry, 2012. "Convergence crisis: economic crisis and convergence in the European Union," International Economics and Economic Policy, Springer, vol. 9(3), pages 297-322, September.
  6. Li, Cheng, 2010. "Government Size and Macroeconomic Stability: Sub-National Evidence from China," MPRA Paper 28226, University Library of Munich, Germany.
  7. Klomp, Jeroen & de Haan, Jakob, 2009. "Political institutions and economic volatility," European Journal of Political Economy, Elsevier, vol. 25(3), pages 311-326, September.
  8. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(2), pages 69–101, July.
  9. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.

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