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Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications

Author

Listed:
  • Xavier Debrun

    () (International Monetary Fund)

  • Radhicka Kapoor

    (London School of Economics)

Abstract

The paper revisits the empirical link between fiscal policy and macroeconomic stability. Our basic presumption is that by definition, the operation of automatic stabilizers should always and everywhere contribute to greater macroeconomic stability (output and consumption). However, two stylized facts seem at odds with that prediction. First, the moderating effect of automatic stabilizers appears to have weakened in advanced economies between the mid-1990s and 2006 (the end of our main sample). Second, automatic stabilizers do not seem to be effective in developing economies. Our analysis addresses these apparent puzzles by accounting for the government’s ambivalent role as a shock absorber and a shock inducer for determinants of macroeconomic volatility over time. Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers.

Suggested Citation

  • 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. 0(2), pages 69-101, July.
  • Handle: RePEc:ief:reveye:v:48:y:2010:i:2:p:69-101
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    File URL: http://ief.eco.unc.edu.ar/files/publicaciones/economiayestadistica/2010_48_n2/03_2010n2_DebrunKapoor.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    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. Květa Kubátová & Aneta Borůvková, 2014. "Changes in Tax Mixes of European Union Countries in Crisis," Český finanční a účetní časopis, University of Economics, Prague, vol. 2014(1), pages 87-104.
    3. Hossein Askari & Abbas Mirakhor, 2014. "Risk sharing, public policy and the contribution of Islamic finance," PSL Quarterly Review, Economia civile, vol. 67(271), pages 345-379.
    4. repec:hpe:journl:y:2019:v:228:i:1:p:13-33 is not listed on IDEAS
    5. Liu, Kai & Poplawski-Ribeiro, Marcos, 2015. "Short- and Long-Run Fiscal Elasticities: International Evidence," MPRA Paper 65950, University Library of Munich, Germany.
    6. repec:abd:kauiea:v:28:y:2015:i:1:no:4:p:93-128 is not listed on IDEAS
    7. Combes, Jean-Louis & Minea, Alexandru & Sow, Moussé, 2017. "Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules," Economic Modelling, Elsevier, vol. 65(C), pages 138-146.
    8. Kashif Munir & Nimra Riaz, 2019. "Fiscal Policy and Macroecomonic Stability in South Asian Countries," Hacienda Pública Española, IEF, vol. 228(1), pages 13-33, March.

    More about this item

    Keywords

    Economic stabilization; Fiscal policy; Fiscal stability.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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