IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v43y2021i6p1388-1414.html
   My bibliography  Save this article

Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states

Author

Listed:
  • Şen, Hüseyin
  • Kaya, Ayşe

Abstract

In this paper, we empirically explore the output-volatility reducing impact of automatic stabilizers and look in detail at their policy implications for selected EMU member states comprising Austria, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, and Spain for the period 1995–2017. Overall, the results suggest that automatic stabilizers deliver a statistically significant, but fairly weak, counter-effect on output volatility in the short run. More specifically, output-volatility responses to automatic stabilizers by a reduction between −0.012 and −0.097 percentage points depending on the proxy measure used for automatic stabilizers. However, the automatic stabilizing impact from taxes and government spending is statistically insignificant in the long run. The results point to two main policy implications: i) automatic stabilizers are an important fiscal mechanism just for the short-run output stabilization, but their output-volatility offsetting role and power are largely subject to proxy measures used for automatic stabilizers; ii) no matter what proxy measures are used, automatic stabilizers largely produce a weak stabilizing performance in dampening short-term output volatility. So, from a macroeconomic policy standpoint, it can be safely claimed that automatic stabilizers can just be an integral part of discretionary fiscal policy rather than being an alternative to it.

Suggested Citation

  • Şen, Hüseyin & Kaya, Ayşe, 2021. "Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states," Journal of Policy Modeling, Elsevier, vol. 43(6), pages 1388-1414.
    • Handle: RePEc:eee:jpolmo:v:43:y:2021:i:6:p:1388-1414
    DOI: 10.1016/j.jpolmod.2020.06.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893820301034
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2020.06.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jan Veld & Martin Larch & Marieke Vandeweyer, 2013. "Automatic Fiscal Stabilisers: What They Are and What They Do," Open Economies Review, Springer, vol. 24(1), pages 147-163, February.
    2. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
    3. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80, National Bureau of Economic Research, Inc.
    4. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
    5. Karras, Georgios & Song, Frank, 1996. "Sources of business-cycle volatility: An exploratory study on a sample of OECD countries," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 621-637.
    6. 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.
    7. Joakim Westerlund, 2006. "Testing for Panel Cointegration with Multiple Structural Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(1), pages 101-132, February.
    8. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 99-125.
    9. 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 1138-1151, December.
    10. Julia Darby & Jacques Melitz, 2008. "Social spending and automatic stabilizers in the OECD [‘Real-time output gaps in ex post policy analysis: A red herring?’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 716-756.
    11. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    12. Jean-Louis Combes & Alexandru Minea & Lavinia Mustea & Thierry Yogo, 2016. "Output effects of fiscal stimulus in Central and Eastern European countries," Post-Communist Economies, Taylor & Francis Journals, vol. 28(1), pages 108-127, January.
    13. 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 Publishing.
    14. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    15. 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.
    16. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    17. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    18. Fatás Antonio & Mihov Ilian, 2012. "Fiscal Policy as a Stabilization Tool," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(3), pages 1-68, October.
    19. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
    20. Beck, Thorsten & Lundberg, Mattias & Majnoni, Giovanni, 2006. "Financial intermediary development and growth volatility: Do intermediaries dampen or magnify shocks?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1146-1167, November.
    21. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    22. Dan Andrews & Daniel Rees, 2009. "Macroeconomic Volatility and Terms of Trade Shocks," RBA Research Discussion Papers rdp2009-05, Reserve Bank of Australia.
    23. Amable, Bruno & Chatelain, Jean-Bernard, 2001. "Can financial infrastructures foster economic development?," Journal of Development Economics, Elsevier, vol. 64(2), pages 481-498, April.
    24. Davide Furceri & Aleksandra Zdzienicka, 2012. "The Effects of Social Spending on Economic Activity: Empirical Evidence from a Panel of OECD Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 33(1), pages 129-152, March.
    25. Kashif Munir & Nimra Riaz, 2019. "Fiscal Policy and Macroecomonic Stability in South Asian Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 228(1), pages 13-33, March.
    26. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    27. Mr. Steven A. Symansky & Mr. Thomas Baunsgaard, 2009. "Automatic Fiscal Stabilizers," IMF Staff Position Notes 2009/023, International Monetary Fund.
    28. Alan J. Auerbach & Daniel R. Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 37-56, Summer.
    29. Hüseyin SEN & Ayse KAYA, 2013. "The Role of Taxes as an Automatic Stabilizer: Evidence from Turkey," Economic Analysis and Policy, Elsevier, vol. 43(3), pages 303-313, December.
    30. Anne Brunila & Marco Buti & Jan In 'T Veld, 2003. "Fiscal Policy in Europe: How Effective Are Automatic Stabilisers?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(1), pages 1-24, March.
    31. Fountas, Stilianos & Karanasos, Menelaos & Kim, Jinki, 2002. "Inflation and output growth uncertainty and their relationship with inflation and output growth," Economics Letters, Elsevier, vol. 75(3), pages 293-301, May.
    32. Olivier Blanchard & Giovanni Dell’Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    33. repec:oup:ecpoli:v:18:y:2003:i:37:p:533-572 is not listed on IDEAS
    34. Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.
    35. Alan J. Auerbach & Kevin A. Hassett, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-249.
    36. Josep Lluís Carrion-i-Silvestre & Tomás del Barrio-Castro & Enrique López-Bazo, 2005. "Breaking the panels: An application to the GDP per capita," Econometrics Journal, Royal Economic Society, vol. 8(2), pages 159-175, July.
    37. Mr. Carlo Cottarelli & Ms. Annalisa Fedelino, 2010. "Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding," IMF Working Papers 2010/155, International Monetary Fund.
    38. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 48(2), pages 69-101, Diciembre.
    39. Jamel Jouini, 2015. "Linkage between international trade and economic growth in GCC countries: Empirical evidence from PMG estimation approach," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(3), pages 341-372, April.
    40. Mr. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability: Automatic Stabilizers Work, Always and Everywhere," IMF Working Papers 2010/111, International Monetary Fund.
    41. Furceri, Davide, 2010. "Stabilization effects of social spending: Empirical evidence from a panel of OECD countries," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 34-48, March.
    42. Julie Tam & Heather Kirkham, 2000. "Automatic Fiscal Stabilisers: Implications for New Zealand," Treasury Working Paper Series 01/10, New Zealand Treasury, revised 2001.
    43. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    44. Steven A. Symansky & Thomas Baunsgaard, 2009. "Automatic Fiscal Stabilizers," IMF Staff Position Notes 2009/23, International Monetary Fund.
    45. Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe [‘Consumption smoothing through fiscal policy in OECD and EU countries’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 533-572.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Şen, Hüseyin & Kaya, Ayşe, 2019. "Output-volatility reducing effect of automatic stabilizers: Evidence from nine EMU member states," EconStor Preprints 206687, ZBW - Leibniz Information Centre for Economics.
    2. Rieth, Malte & Checherita-Westphal, Cristina & Attinasi, Maria-Grazia, 2016. "Personal income tax progressivity and output volatility: Evidence from OECD countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 49(3), pages 968-996.
    3. Giorgio Motta & Patrizio Tirelli, 2012. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1351-1374, October.
    4. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    5. Kashif Munir & Nimra Riaz, 2019. "Fiscal Policy and Macroecomonic Stability in South Asian Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 228(1), pages 13-33, March.
    6. Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.
    7. Solomos, Dionysios & Papageorgiou, Theofanis & Koumparoulis, Dimitrios, 2012. "Financial Sector and Business Cycles Determinants in the EMU context: An Empirical Approach (1996-2011)," MPRA Paper 43858, University Library of Munich, Germany.
    8. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-37.
    9. Jan Veld & Martin Larch & Marieke Vandeweyer, 2013. "Automatic Fiscal Stabilisers: What They Are and What They Do," Open Economies Review, Springer, vol. 24(1), pages 147-163, February.
    10. Reicher, Christopher Phillip, 2013. "A set of estimated fiscal rules for a cross section of countries: Stabilization and consolidation through which instruments?," Kiel Working Papers 1850, Kiel Institute for the World Economy (IfW Kiel).
    11. Stevan Luković, 2014. "The Role Of The Automatic Stabilizers In Modern Economy," Ekonomika, Journal for Economic Theory and Practice and Social Issues 2014-01, „Ekonomika“ Society of Economists, Niš (Serbia).
    12. Teresa Ghilarducci & Joelle Saad-Lessler & Eloy Fisher, 2011. "The Automatic Stabilizing Effects of Social Security and 401(k) Plans," SCEPA working paper series. 2011-2, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    13. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2016. "Economic Resilience: What Role for Policies?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-44, June.
    14. Mathias Dolls & Clemens Fuest & Andreas Peichl & Christian Wittneben, 2022. "Fiscal Consolidation and Automatic Stabilization: New Results," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(3), pages 420-450, September.
    15. Heimberger, Philipp, 2023. "The cyclical behaviour of fiscal policy: A meta-analysis," Economic Modelling, Elsevier, vol. 123(C).
    16. Kuncoro Haryo, 2016. "The Credibility of Fiscal Rules Policy and Business Cycle Volatility," Scientific Annals of Economics and Business, Sciendo, vol. 63(2), pages 209-224, June.
    17. Jalles, João Tovar, 2020. "The volatility impact of social expenditure’s cyclicality in advanced economies," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 26-40.
    18. Aleksandr Arsenev & Philipp Heimberger & Bernhard Schütz, 2024. "Das konjunkturelle Verhalten der Staatsausgaben für Gesundheit und Soziales in Österreich und Deutschland: Wie robust ist die OECD-Methodik?," wiiw Research Reports in German language 25, The Vienna Institute for International Economic Studies, wiiw.
    19. Dionysios K. Solomos & Dimitrios N. Koumparoulis, 2013. "Financial Sector and Business Cycles Determinants in the EMU: An Empirical Approach (1996-2011)," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 34-58.
    20. Owusu Benjamin, 2021. "Fiscal Sustainability Hypothesis Test in Central and Eastern Europe: A Panel Data Perspective," Central European Economic Journal, Sciendo, vol. 8(55), pages 285-312, January.

    More about this item

    Keywords

    Fiscal policy; Automatic stabilizers; PMG estimator; EMU member states;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:43:y:2021:i:6:p:1388-1414. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.