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Automatic Stabilisation, Discretionary Policy and the Stability Pact

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Author Info
Jerome Creel () (Observatoire Français des Conjonctures Économiques, ESCP-EAP)
Francesco Saraceno () (Observatoire Français des Conjonctures Économiques)

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Abstract

This paper describes recent trends on the efficiency of stabilisers in the European Union. Using both macro evidence on the cyclical sensitivity of budget deficit to economic activity, and micro evidence on the tax and expenditure profiles, we conclude, in agreement with the recent literature, that the importance of automatic stabilisation has decreased. After remarking that this trend is contradictory with the current economic institutions of Europe relying exclusively on automatic stabilisation for the conduct of fiscal policy, we argue that increasing flexibility, one alternative way to reduce cyclical fluctuations, does not seem a viable path. The paper concludes defending the appropriateness of discretionary fiscal policy. We argue by means of a simple model that the theoretical arguments against its use are not conclusive, and we describe a recent stream of literature, based on structural VAR models, that concludes rather robustly for the effectiveness of discretionary fiscal policy in the short and long run.

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Publisher Info
Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2008-15.

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Date of creation: 2008
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Handle: RePEc:fce:doctra:0815

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Related research
Keywords: Automatic stabilisers; progressivity; unemployment benefits; discretionary fiscal policy; European fiscal institutions;

Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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References listed on IDEAS
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  1. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 533-572, October. [Downloadable!] (restricted)
    Other versions:
  2. Philip Arestis & Malcolm Sawyer, 2003. "Reinventing fiscal policy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(1), pages 3-25, October. [Downloadable!] (restricted)
    Other versions:
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  4. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March. [Downloadable!] (restricted)
  5. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October. [Downloadable!] (restricted)
  6. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Blackwell Publishing, vol. 17(1), pages 55-78, February. [Downloadable!] (restricted)
  7. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November. [Downloadable!] (restricted)
  8. Miguel A. LeÛn-Ledesma & A. P. Thirlwall, 2002. "The endogeneity of the natural rate of growth," Cambridge Journal of Economics, Oxford University Press, vol. 26(4), pages 441-459, July.
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  9. Barrell, Ray & Pina, Alvaro M., 2004. "How important are automatic stabilisers in Europe? A stochastic simulation assessment," Economic Modelling, Elsevier, vol. 21(1), pages 1-35, January. [Downloadable!] (restricted)
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  10. Andres, Javier & Domenech, Rafael & Fatas, Antonio, 2008. "The stabilizing role of government size," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 571-593, February. [Downloadable!] (restricted)
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