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Is There a Role for Discretionary Fiscal Policy?

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  • Alan Auerbach

Abstract

This paper reviews the state of discretionary fiscal policy. Among its findings are: (1) In recent years, U.S. discretionary fiscal policy appears to have become more active in response to both cyclical conditions and a simple measure of budget balance. (2) Considerable uncertainty remains about how large an impact discretionary fiscal policy has on output. (3) There is little evidence that discretionary fiscal policy has played an important stabilization role during recent decades. (4) Budgetary pressure may weaken the efficacy of expansionary fiscal policy. Conversely, contractionary fiscal policy might have a salutary effect on output. This possibility may be relevant for understanding the impact of fiscal policy in the 1990s, although the mechanism is unclear. (5) The automatic stabilizers embedded in the fiscal system have experienced little net change since the 1960s and have contributed to cushioning cyclical fluctuations. But the tax system has many attributes that weaken its potential role as an automatic stabilizer, particularly with respect to investment. (6) The government's reported fiscal position, to which fiscal policy appears responsive, represents a very poor measure of underlying fiscal balance.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9306.

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Date of creation: Nov 2002
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Publication status: published as Alan J. Auerbach, 2002. "Is there a role for discretionary fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 109-150.
Handle: RePEc:nbr:nberwo:9306

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  1. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 213-24, January.
  2. Matthew D. Shapiro & Joel Slemrod, 2001. "Consumer Response to Tax Rebates," NBER Working Papers 8672, National Bureau of Economic Research, Inc.
  3. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1259-1289, June.
  4. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 71(1), pages 132-43, March.
  5. Alan J. Auerbach & Daniel Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," NBER Working Papers 7662, National Bureau of Economic Research, Inc.
  6. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 61-86, February.
  7. Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 211-16, May.
  8. Thomas J. Kniesner & James P. Ziliak, 2000. "Tax Reform and Automatic Stabilization," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 165, Northwestern University/University of Chicago Joint Center for Poverty Research.
  9. Alan J. Auerbach, 2000. "Formation of fiscal policy: the experience of the past twenty-five years," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Apr, pages 9-23.
  10. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1399-1436, November.
  11. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 947-958, September.
  12. Auerbach, Alan J. & Kotlikoff, Laurence J. & Leibfritz, Willi (ed.), 1999. "Generational Accounting around the World," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226032139, 01-2013.
  13. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80 National Bureau of Economic Research, Inc.
  14. Bernd Raffelhuschen & Laurence J. Kotlikoff, 1999. "Generational Accounting around the Globe," American Economic Review, American Economic Association, American Economic Association, vol. 89(2), pages 161-166, May.
  15. Auerbach, Alan J. & Hassett, Kevin, 1992. "Tax policy and business fixed investment in the United States," Journal of Public Economics, Elsevier, Elsevier, vol. 47(2), pages 141-170, March.
  16. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
  17. Nigel Pain, 2002. "Fiscal Incentives, European Integration and the Location of Foreign Direct Investment," NIESR Discussion Papers, National Institute of Economic and Social Research 147, National Institute of Economic and Social Research.
  18. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-62, November.
  19. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 1999. "Searching for Non-Keynesian Effects of Fiscal Policy," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 16, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  20. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 21(3), pages 905-40, September.
  21. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 959-973, September.
  22. Jagadeesh Gokhale & Benjamin R. Page & John Sturrock, 1999. "Generational Accounts for the United States: An Update," NBER Chapters, National Bureau of Economic Research, Inc, in: Generational Accounting around the World, pages 489-518 National Bureau of Economic Research, Inc.
  23. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
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  1. > Political Economy > The Political Economy of the European Union > Economic Policy and Policy-Making in the European Union
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