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Is there a Role for an Active Fiscal Stabilization Policy?

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  • Torben Andersen

Abstract

This paper discusses the need and scope for an active fiscal stabilization policy. It is argued that the effectiveness of fiscal policy as a short run stabilizer does not depend on the long run multipliers of (balanced budget) fiscal policies. To the extent that activity can be affected by aggregate demand in the short run, there is a case for a fiscal stabilization policy in terms of temporary variations in taxes or public consumption contingent on the state of the economy. The effectiveness of fiscal policy is supported by empirical evidence. However, an appropriate policy intervention depends both on the nature of the shock and the structure of the economy. There are thus fundamental information problems in pursuing discretionary fiscal policies on top of political economy concerns, and fiscal fine-tuning is not to be recommended. Automatic stabilizers do not to the same extent suffer from these problems, but their strength is not by design but the net result of other policy considerations. Hence, there is a need to consider the structure and size of automatic stabilizers.

Suggested Citation

  • Torben Andersen, 2005. "Is there a Role for an Active Fiscal Stabilization Policy?," CESifo Working Paper Series 1447, CESifo.
  • Handle: RePEc:ces:ceswps:_1447
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    1. Gösta Ljungman, 2008. "Expenditure Ceilings—A Survey," IMF Working Papers 2008/282, International Monetary Fund.
    2. Francesco Furlanetto & Martin Seneca, 2012. "Rule‐of‐Thumb Consumers, Productivity, and Hours," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 658-679, June.
    3. Nilsson, Kristian, 2008. "Conceptual Framework for Fiscal Policy," Occasional Papers 16, National Institute of Economic Research.
    4. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-37.
    5. Musa Success Jibrin & Success Ejura Blessing & Iyaji Danjuma, 2014. "The Effects of Public Expenditure on Private Investment and Economic Growth in Nigeria," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 3(2), pages 90-97.
    6. Torben M. Andersen, 2016. "Automatic stabilizers—the intersection of labour market and fiscal policies," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-18, December.
    7. Thomas Beissinger, 2006. "Neue Anforderungen an eine gesamtwirtschaftliche Stabilisierung," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 277/2006, Department of Economics, University of Hohenheim, Germany.
    8. Sebastian Dullien & Daniela Schwarzer, 2009. "Bringing Macroeconomics into the EU Budget Debate: Why and How?," Journal of Common Market Studies, Wiley Blackwell, vol. 47, pages 153-174, January.

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    More about this item

    Keywords

    shocks; insurance; adjustment failures; rules; discretion and fiscal policy;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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