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How Important are Automatic Stabilisers in Europe? A Stochastic Simulation Assessment

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  • Ray Barrell

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  • Álvaro M. Pina

Abstract

In this paper we formalize budgetary stabilisers as a set of simple policy rules, and assess their operation in an uncertain environment by performing stochastic simulations in a forward-looking multi-country macroeconometric model, NiGEM, comprising individual blocks for 10 Euroland economies. Automatic stabilisers make output volatility decrease by 11 per cent for Euroland as a whole - less than in previous studies, as these have overemphasised demand shocks. We also find that, provided countries comply with their announced fiscal consolidation programmes, built-in stabilisers and the Stability and Growth Pact are broadly compatible.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 196.

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Date of creation: Mar 2002
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Handle: RePEc:nsr:niesrd:196

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  1. Ray C. Fair & John B. Taylor, 1989. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Cowles Foundation Discussion Papers 921, Cowles Foundation for Research in Economics, Yale University.
  2. Barrell, Ray & Sefton, James, 1997. "Fiscal Policy and the Masstricht Solvency Criteria," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(3), pages 259-79, June.
  3. Ray Barrell & Ian Hurst & Álvaro Pina, 2002. "Fiscal Targets, Automatic Stabilisers and their Effects on Output," Working Papers Department of Economics 2002/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Darrel Cohen & Glenn Follette, 2000. "The automatic fiscal stabilizers: quietly doing their thing," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 35-67.
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  6. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, December.
  7. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
  8. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  9. Brown, Bryan W & Mariano, Roberto S, 1984. "Residual-Based Procedures for Prediction and Estimation in a Nonlinear Simultaneous System," Econometrica, Econometric Society, vol. 52(2), pages 321-43, March.
  10. Thomas Dalsgaard & Alain de Serres, 1999. "Estimating Prudent Budgetary Margins for 11 EU Countries: A Simulated SVAR Model Approach," OECD Economics Department Working Papers 216, OECD Publishing.
  11. Diebalek, Leopold & Schuberth, Helene & Brandner, Peter, 1998. "Structural Budget Deficits and Sustainability of Fiscal Positions in the European Union," Working Papers 26, Oesterreichische Nationalbank (Austrian Central Bank).
  12. Buti, Marco & Franco, Daniele & Ongena, Hedwig, 1998. "Fiscal Discipline and Flexibility in EMU: The Implementation of the Stability and Growth Pact," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 81-97, Autumn.
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  14. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 65-113, 04.
  15. Ray Barrell & Dirk Willem te Velde, 2002. "European Integration and Manufactures Import Demand: An Empirical Investigation of Ten European Countries," German Economic Review, Verein für Socialpolitik, vol. 3(3), pages 263-293, 08.
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Cited by:
  1. Hüseyin SEN & Ayse KAYA, 2013. "The Role of Taxes as an Automatic Stabilizer: Evidence from Turkey," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 43(3), pages 303-313, December.
  2. Breuss, Fritz & Roeger, Werner, 2005. "The SGP fiscal rule in the case of sluggish growth: Simulations with the QUEST model," Journal of Policy Modeling, Elsevier, vol. 27(7), pages 767-788, October.
  3. Ray Barrell & Bettina Becker & Joseph P Byrne & Sylvia Gottschalk & Ian Hurst & Desirée van Welsum, 2003. "Macroeconomic Policy in Europe: Experiments with monetary responses and fiscal impulses," NIESR Discussion Papers 218, National Institute of Economic and Social Research.
  4. Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Society for Computational Economics, vol. 31(1), pages 21-43, February.
  5. Dury, K. & Pina, A.M., 2000. "Fiscal Policy in EMU: Simulating the Operation of the Stability Pact," Economics Working Papers eco2000/3, European University Institute.
  6. Jerome Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Documents de Travail de l'OFCE 2008-15, Observatoire Francais des Conjonctures Economiques (OFCE).
  7. Maria Silgoner & Jesus Crespo Cuaresma & Gerhard Reitschuler, 2004. "The fiscal smile - on the effectiveness and limits of fiscal stabilizers," Money Macro and Finance (MMF) Research Group Conference 2003 87, Money Macro and Finance Research Group.
  8. Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers," IMF Working Papers 03/182, International Monetary Fund.
  9. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005.
  10. Hiebert, Paul & Pérez, Javier J. & Rostagno, Massimo, 2009. "The trade-off between public debt reduction and automatic stabilisation," Economic Modelling, Elsevier, vol. 26(2), pages 464-472, March.
  11. Gábor Orbán & György Szapáry, 2004. "The Stability and Growth Pact from the Perspective Of the New Member States," William Davidson Institute Working Papers Series 2004-709, William Davidson Institute at the University of Michigan.
  12. Dinga, Emil & Ionescu, Cornel & Padurean, Elena, 2010. "Discretionary Policy versus Non-Discretionary Policy in the Economic Adjustment Process," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 184-207, December.
  13. Jaakko Kiander & Matti Virén, 2000. "Do automatic stabilisers take care of asymmetric shocks in the euro area?," Discussion Papers 234, Government Institute for Economic Research Finland (VATT).

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