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Automatic Stabilizers and the Size of Government

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  • Carlo Cottarelli
  • Annalisa Fedelino
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    Abstract

    The size of government is a commonly used variable in many analytical studies on the effects of fiscal policy. An accepted practice is to measure it as the ratio of government spending to GDP. However, this is not the correct metric when computing the stabilization effects of nondiscretionary fiscal policy. Intuitively, public spending does not react to cyclical conditions as much as taxes do - as reflected in the standard zero-one elasticity assumptions for spending and revenue, respectively. This paper shows that the revenue to GDP ratio is the appropriate indicator of government size for the purpose of assessing the stabilization effects of nondiscretionary fiscal policy.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/155.

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    Length: 14
    Date of creation: 01 Jul 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/155

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    Related research

    Keywords: Fiscal policy; Government expenditures; Stabilization measures; Economic growth; fiscal balances; budget balance; public spending; government spending; tax system; expenditure ratio; budget balances; fiscal affairs department; fiscal stabilizers; public expenditure; taxation; expenditure data; budgetary process; flat income tax; fiscal policies; tax burden; fiscal variables; aggregate demand; budget balance ratio; fiscal policy response; public finance; tax revenues; fiscal developments; tax income; fiscal studies; budget position; government revenue; size of government spending;

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    1. Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 0077, European Central Bank.
    2. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability," IMF Working Papers 10/111, International Monetary Fund.
    3. Young Lee & Taeyoon Sung, 2007. "Fiscal Policy, Business Cycles and Economic Stabilisation: Evidence from Industrialised and Developing Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 28(4), pages 437-462, December.
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    Cited by:
    1. 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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