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The Tradeoff between Efficiency and Macroeconomic Stabilization in Europe

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  • MARTINEZ-MONGAY Carlos
  • SEKKAT Khalid

Abstract

The paper contributes to the debate on the stability/efficiency tradeoff of automatic stabilizers. A simple AD-AS two countries model is presented and illustrates circumstances where a reduction in taxes can foster stabilization. The testable implication from the model is that tax cuts can either increase or decrease volatility depending on the structure of the taxation system. Hence, lowering taxes for efficiency purposes may not cost in terms of stabilization. This implication is tested on a sample of 25 OECD countries over the period 1960-1999 taking account of the endogeneity and omitted variables issues identified in the literature. We found acceptably robust evidence that the size of governments in OECD countries has played a stabilizing role for both output and inflation. However, the relationship between government size and macroeconomic stability is not linear. The composition of public finances, in particular the tax mix, matters for output and price volatility. Distorting taxes, namely taxes on labor and capital, might have negative effects on macroeconomic stability. Consequently, the potential trade off between stability and flexibility might not exist.
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  • MARTINEZ-MONGAY Carlos & SEKKAT Khalid, 2010. "The Tradeoff between Efficiency and Macroeconomic Stabilization in Europe," EcoMod2003 330700095, EcoMod.
    • Handle: RePEc:ekd:003307:330700095
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    References listed on IDEAS

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    Cited by:

    1. Jean-Luc Demeulemeester & Olivier Debande, 2008. "Quality and Variety Competition in Higher Education," Working Papers 08-10, Association Française de Cliométrie (AFC).
    2. Andres, Javier & Domenech, Rafael & Fatas, Antonio, 2008. "The stabilizing role of government size," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 571-593, February.
    3. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
    4. Régis Blazy & Laurent Weill, 2006. "The Impact of Legal Sanctions on Moral Hazard when Debt Contracts are Renegotiable," LSF Research Working Paper Series 06-09, Luxembourg School of Finance, University of Luxembourg.
    5. Carlos Martinez-Mongay & Khalid Sekkat, 2003. "The tradeoff between efficiency and macroeconomic stabilization in Europe," Working Papers CEB 04-024.RS, ULB -- Universite Libre de Bruxelles.
    6. Henri Capron, 2007. "Politique de cohésion et développement régional," DULBEA Working Papers 07-16.RS, ULB -- Universite Libre de Bruxelles.
    7. Ariane Szafarz, 2007. "Hiring people-like-yourself: a representation of discrimination on the job market," DULBEA Working Papers 07-21.RS, ULB -- Universite Libre de Bruxelles.
    8. Pierre-Guillaume Méon & Friedrich Schneider & Laurent Weill, 2007. "Does taking the shadow economy into account matter to measure aggregate efficiency?," Working Papers CEB 07-027.RS, ULB -- Universite Libre de Bruxelles.
    9. Pierre-Guillaume Méon & Laurent Weill, 2006. "Does financial intermediation matter for macroeconomic efficiency?," DULBEA Working Papers 06-13.RS, ULB -- Universite Libre de Bruxelles.
    10. Olga Bourachnikova, 2007. "Weighting Function in the Behavioral Portfolio Theory," Working Papers CEB 07-011.RS, ULB -- Universite Libre de Bruxelles.
    11. Javier Andrés & Rafael Doménech, 2006. "Fiscal Rules and Macroeconomic Stability," Hacienda Pública Española / Review of Public Economics, IEF, vol. 176(1), pages 9-41, April.
    12. Ilan Tojerow, 2008. "Industry Wage Differentials Rent Sharing and Gender in Belgium," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(3), pages 55-65.
    13. Jean Luc De Meulemeester, 2007. "L'économie de l'éducation fait-elle des progrès? Une perspective d'histoire de la pensée économique," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 89-111.
    14. Oscar Bernal Diaz, 2006. "Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan," DULBEA Working Papers 06-03.RS, ULB -- Universite Libre de Bruxelles.
    15. Hassan Ayoub & Jérôme Creel & Etienne Farvaque, 2008. "Détermination du niveau des prix et finances: le cas du Liban 1965-2005," DULBEA Working Papers 08-10.RS, ULB -- Universite Libre de Bruxelles.
    16. Benoît Mahy & François Rycx & Mélanie Volral, 2008. "L'influence de la dispersion salariale sur la performance des grandes entreprises belges," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(3), pages 27-40.
    17. Henri Capron & Michele Cincera, 2007. "EU pre-competitive and near-the-market S&T collaborations," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 135-159.
    18. Charles Plaigin, 2009. "Exploratory study on the presence of cultural and institutional growth spillovers," DULBEA Working Papers 09-03.RS, ULB -- Universite Libre de Bruxelles.
    19. Jérôme De Henau & Leila Maron & Danièle Meulders & Sile Padraigin O'Dorchai, 2007. "Travail et maternité en Europe: conditions de travail et politiques publiques," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 63-88.
    20. Sile Padraigin O'Dorchai, 2008. "Pay inequality in 25 European countries," DULBEA Working Papers 0006, ULB -- Universite Libre de Bruxelles.
    21. Caroline Gerschlager, 2008. "Foolishness and identity: Amartya Sen and Adam Smith," DULBEA Working Papers 08-03.RS, ULB -- Universite Libre de Bruxelles.
    22. Abdeslam Marfouk, 2008. "The African brain drain: scope and determinants," DULBEA Working Papers 08-07.RS, ULB -- Universite Libre de Bruxelles.

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