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Is there a role for discretionary fiscal policy?

  • Alan J. Auerbach

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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Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2002)
Issue (Month): ()
Pages: 109-150

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Handle: RePEc:fip:fedkpr:y:2002:p:109-150
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  1. Thomas J. Kniesner & James P. Ziliak, 2000. "Tax Reform and Automatic Stabilization," Econometric Society World Congress 2000 Contributed Papers 0788, Econometric Society.
  2. Alan J. Auerbach & James R. Hines Jr., 1988. "Investment Tax Incentives and Frequent Tax Reforms," NBER Working Papers 2492, National Bureau of Economic Research, Inc.
  3. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
  4. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 1999. "Searching for Non-Keynesian Effects of Fiscal Policy," CSEF Working Papers 16, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  5. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. 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.
  7. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  8. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
  9. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  10. Alan J. Auerbach & Kevin Hassett, 1991. "Tax Policy and Business Fixed Investment in the United States," NBER Working Papers 3619, National Bureau of Economic Research, Inc.
  11. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  12. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," CEPR Discussion Papers 2374, C.E.P.R. Discussion Papers.
  13. Kotlikoff, L.J. & Raffelhuschen, B., 1999. "Generational Accounting around the Globe," Norway; Department of Economics, University of Bergen 195, Department of Economics, University of Bergen.
  14. Matthew D. Shapiro & Joel Slemrod, 2001. "Consumer Response to Tax Rebates," NBER Working Papers 8672, National Bureau of Economic Research, Inc.
  15. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February.
  16. 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.
  17. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  18. Alan J. Auerbach & Daniel Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," NBER Working Papers 7662, National Bureau of Economic Research, Inc.
  19. Hubert, Florence & Pain, Nigel, 2002. "Fiscal Incentives, European Integration and the Location of Foreign Direct Investment," Manchester School, University of Manchester, vol. 70(3), pages 336-63, June.
  20. Jagadeesh Gokhale & Benjamin R. Page & John Sturrock, 1999. "Generational Accounts for the United States: An Update," NBER Chapters, in: Generational Accounting around the World, pages 489-518 National Bureau of Economic Research, Inc.
  21. 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, issue Apr, pages 9-23.
  22. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  23. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
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