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The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers

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Author Info
Maria Antoinette Silgoner
Gerhard Reitschuler
Jesús Crespo-Cuaresma

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Abstract

We study the smoothing impact of fiscal stabilizers (proxied by government expenditures or revenues) on business cycle volatility for a panel of EU countries in the period 1970-99. The results show that the business cycle volatility smoothing effect of fiscal stabilizers may revert at high levels. We present evidence that for government expenditure ratios exceeding an estimated value of about 38 percent, a further expansion in the size of the government could actually lead to an increase in cyclical volatility. This may call for a reconsideration of the use of fiscal stabilizers for business cycle smoothing.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/182.

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Length: 29 pages
Date of creation: 15 Oct 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/182

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Keywords: Fiscal policy ; Business cycles ; Government expenditures ; Economic models ;

References listed on IDEAS
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. Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers 1130, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Barrell, R. & Pina, A.M., 2000. "How Important are Automatic Stabilizers in Europe? A Stochastic Simulation Assessment," Economics Working Papers eco2000/2, European University Institute.
    Other versions:
  3. Alesina, Alberto, et al, 1996. " Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
    Other versions:
  4. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October. [Downloadable!] (restricted)
    Other versions:
  5. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  6. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD, Economics Department. [Downloadable!]
  7. Alberto Alesina & Romain Wacziarg, 1997. "Openness, Country Size and the Government," NBER Working Papers 6024, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Peter S. Heller, 2002. "Considering the IMF's Perspective on a "Sound Fiscal Policy"," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 141-, February.
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  9. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  10. Huber, Gerald & Kocher, Martin & Sutter, Matthias, 2003. " Government Strength, Power Dispersion in Governments and Budget Deficits in OECD-Countries: A Voting Power Approach," Public Choice, Springer, vol. 116(3-4), pages 333-50, September. [Downloadable!] (restricted)
  11. Artis, Michael J & Marcellino, Massimiliano & Proietti, Tommaso, 2003. "Dating the Euro Area Business Cycle," CEPR Discussion Papers 3696, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany. [Downloadable!]
  13. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
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  14. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
    Other versions:
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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. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," BORRADORES DE ECONOMIA 002730, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Ignacio Lozano & Jorge Toro, . "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia. [Downloadable!]
  3. Matti Virén, 2005. "Government size and output volatility: is there a relationship?," Macroeconomics 0508025, EconWPA. [Downloadable!]
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