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Automatic Stabilisers and Market Flexibility in EMU: Is There A Trade-Off?

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Author Info

  • Marco Buti
  • Carlos Martinez-Mongay
  • Khalid Sekkat
  • Paul van den Noord

Abstract

It is often claimed that tax and welfare reforms that aim at enhancing efficiency may come at the cost of cyclical stabilisation. Reducing the generosity of welfare systems and lowering taxes may boost efficiency and output, and improve market adjustment to shocks. But, by reducing the size of automatic stabilisers, it may also imply less cyclical smoothing. This would be unwelcome in EMU given the loss of national monetary autonomy and the well-known pitfalls of active fiscal management. This paper argues that the alleged trade-off between efficiency/flexibility and stabilisation may not exist. We show that, if the initial level of the tax burden is high, reducing it may lead to higher output stabilisation in the event of a supply shock and higher inflation stabilisation in the event of a demand shock. The threshold level of taxation depends on the preferences of the central bank over inflation and output. Econometric and numerical simulations show that European countries — ... Stabilisateurs automatiques et flexibilité de marchés de l'UEM. Y-a-t-il un compromis ? On a souvent proclamé que les réformes fiscales et sociales ayant pour objectif d'augmenter l'efficacité économique pouvaient se faire au détriment de la stabilisation des cycles économiques. En effet, la réduction de la générosité des systèmes de sécurité sociale et l'abaissement des impôts tendent à accroître l'efficacité de l'activité économique et à améliorer la capacité d'ajustement des marchés aux chocs. Cependant, réduire la taille des stabilisateurs automatiques peut également impliquer une augmentation des oscillations cycliques. Cela serait contrariant au sein de l'UEM, étant donné la perte d'autonomie monétaire au niveau national, ainsi que les problèmes associés à l’activisme fiscal. Cet article établi que la contradiction potentielle entre efficacité/flexibilité et stabilisation peut ne pas exister. Nous montrons que, lorsque le niveau initial des prélèvements obligatoires est élevé, sa réduction peut renforcer la stabilisation de la production en réponse à un choc ...

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 335.

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Date of creation: 26 Jul 2002
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Handle: RePEc:oec:ecoaaa:335-en

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Keywords: fiscal policy; automatic stabilisers; Economic and Monetary Union; shocks; choc; politique fiscale; Union économique et monétaire; stabilisateurs automatiques;

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Cited by:
  1. Kotilainen, Markku, . "Economic Shocks, Progressiveness of Taxation, and Indexation of Taxes and Public Expenditure in EMU," Discussion Papers 1011, The Research Institute of the Finnish Economy.
  2. Anne Brunila & Marco Buti & Jan in 't Veld, 2002. "Fiscal policy in Europe: how effective are automatic stabilisers?," European Economy - Economic Papers 177, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Khalid Sekkat & Marco Buti & Carlos Martinez-Mongay & Paul van den Noord, 2003. "Automatic fiscal stabilisers in EMU: a conflict between efficiency and stabilization?," ULB Institutional Repository 2013/7354, ULB -- Universite Libre de Bruxelles.
  4. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.
  5. Torben M. Andersen, 2003. "Wage formation and European integration," European Economy - Economic Papers 188, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. repec:ebl:ecbull:v:5:y:2006:i:9:p:1-11 is not listed on IDEAS
  7. Schalck, Christophe, 2006. "Règles Budgétaires et Gestion du Policy-Mix dans l'UEM Budgetary Rules and Management of the Policy-Mix in the UME," MPRA Paper 1434, University Library of Munich, Germany, revised Oct 2006.
  8. Schalck, Christophe, 2006. "Coordination des Politiques Budgétaires dans une Union Monétaires Hétérogène: Modélisation et Application à l'UEM Coordination of Budgetary Policies in a Heterogeneous Monetary Union: Modelisat," MPRA Paper 1435, University Library of Munich, Germany.
  9. Christophe Schalck, 2006. "EMU's Fiscal Rules and Economic Stabilization," Economics Bulletin, AccessEcon, vol. 5(4), pages 1-8.
  10. Christophe Schalck, 2006. "The stability Pact and the coordination of fiscal policies in the EMU," Economics Bulletin, AccessEcon, vol. 5(9), pages 1-11.
  11. repec:ebl:ecbull:v:5:y:2006:i:4:p:1-8 is not listed on IDEAS

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