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The role of automatic stabilizers in the U.S. business cycle

Author

Listed:
  • Alisdair McKay

    (Boston University)

  • Ricardo Reis

    (Columbia University)

Abstract

Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures how e↵ective they are. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data, as well as the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role on the e↵ectiveness of the stabilizers, whereas tax-and- transfer programs that a↵ect inequality and social insurance can have a large e↵ect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the United States has barely had any e↵ect on volatility. According to our model, expanding safety-net programs, like food stamps, has the largest potential to enhance the e↵ectiveness of the stabilizers.

Suggested Citation

  • Alisdair McKay & Ricardo Reis, 2013. "The role of automatic stabilizers in the U.S. business cycle," Boston University - Department of Economics - Working Papers Series 2013-007, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2013-007
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    Keywords

    Countercyclical fiscal policy; Heterogeneous agents; Fiscal multipliers.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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