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Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD

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  • Melitz, Jacques

Abstract

Official adjustments of the budget balance to the cycle merely assume that the only category of government spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common to borrow official figures for cyclically adjusted budget balances, divide by potential output, and then use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of the cyclically-independent ratios of budget balances divided by potential output. (A fortiori, they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.) Accordingly, the paper provides separate estimates of the impact of the cycle on the levels of budget balances and the ratios of budget balances to output. In addition, it discusses the relation between the two sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustments depend more on inertia in government spending on goods and services than they do on taxes (which are largely proportional to output). But they depend even still more on transfer payments. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to ‘let the automatic stabilizers work’.

Suggested Citation

  • Melitz, Jacques, 2005. "Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD," CEPR Discussion Papers 4988, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4988
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    References listed on IDEAS

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    Cited by:

    1. Antonio Fatás & Ilian Mihov, 2010. "The Euro and Fiscal Policy," NBER Chapters,in: Europe and the Euro, pages 287-324 National Bureau of Economic Research, Inc.
    2. Edoardo Gaffeo & Giuliana Passamani & Roberto Tamborini, 2005. "Fiscal and monetary policy, unfortunate events, and the SGP arithmetics - Evidence from a growth-gaps model," Department of Economics Working Papers 0519, Department of Economics, University of Trento, Italia.
    3. Ana Lamo & Javier J. Pérez & Ludger Schuknecht, 2013. "The cyclicality of consumption, wages and employment of the public sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(12), pages 1551-1569, April.
    4. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers 7271, C.E.P.R. Discussion Papers.
    5. Deborah Mabbett & Waltraud Schelkle, 2007. "Bringing Macroeconomics Back into the Political Economy of Reform: the Lisbon Agenda and the 'Fiscal Philosophy' of EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 45, pages 81-103, March.
    6. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ. Revista vasca de Economía, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.

    More about this item

    Keywords

    automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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