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Automatic stabilizers, fiscal rules and macroeconomic stability

  • Javier Andrés

    ()

    (Universidad de Valencia)

  • Rafael Doménech

    ()

    (Universidad de Valencia)

This paper analyzes the effect of the fiscal structure upon the trade-off between inflation and output stabilization in the presence of technological shocks in a DGE model with nominal and real rigidities. The model reproduces the main features of European economies and it integrates a rich menu of fiscal variables as well as a target on the debt to output ratio. The main result of this paper is that distortionary taxes tend to increase output volatility relative to lump-sum taxes unless substantial rigidities are present. We explore in detail the mechanisms that generate such a result, and the conditions under which the supply-side effects of distortionary taxes and the procyclical behaviour of public spending induced by fiscal rules prevail over the conventional effect of automatic stabilizers operating through disposable income.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0314e.pdf
File Function: First version, October 2003
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0314.

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Length: 25 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:bde:wpaper:0314
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