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Automatic Fiscal Stabilisers: What they are and what they do

  • Jan in't Veld
  • Martin Larch
  • Marieke Vandeweyer

The global financial and economic crisis has revived the debate in the academic literature and in policy circles about the size and effectiveness of automatic fiscal stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilisers is crucial. While automatic stabilisers are a fairly established concept in the fiscal policy literature, there is still no consensus about their actual nature and their effectiveness. This paper shows that differences in opinion mirror a deeper disagreement over how the budget would look like without automatic stabilisers. This issue is addressed by defining two types of counterfactual budgets giving rise to two different interpretations about the nature of automatic stabilisation. Simulations with a structural model confirm that the degree of smoothing is conditional on how the counterfactual budget, i.e. the budget without automatic stabilisers, is defined.

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Paper provided by KU Leuven, Faculty of Economics and Business, VIVES Research Centre for Regional Economics in its series Working Papers VIVES Research Centre for Regional Economics with number 29.

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Date of creation: 2012
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Handle: RePEc:ete:vivwps:29
Contact details of provider: Web page: https://feb.kuleuven.be/VIVES/vivesenglish/general/

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  1. Anne Brunila & Marco Buti & Jan In 'T Veld, 2003. "Fiscal Policy in Europe: How Effective Are Automatic Stabilisers?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(1), pages 1-24, March.
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  14. John B. Taylor, 2009. "The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy," American Economic Review, American Economic Association, vol. 99(2), pages 550-55, May.
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