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Automatic Stabilisation, Discretionary Policy and the Stability Pact

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  • Jérôme Creel

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Francesco Saraceno

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

This paper describes recent trends on the efficiency of stabilisers in the European Union. Using both macro evidence on the cyclical sensitivity of budget deficit to economic activity, and micro evidence on the tax and expenditure profiles, we conclude, in agreement with the recent literature, that the importance of automatic stabilisation has decreased. After remarking that this trend is contradictory with the current economic institutions of Europe relying exclusively on automatic stabilisation for the conduct of fiscal policy, we argue that increasing flexibility, one alternative way to reduce cyclical fluctuations, does not seem a viable path. The paper concludes defending the appropriateness of discretionary fiscal policy. We argue by means of a simple model that the theoretical arguments against its use are not conclusive, and we describe a recent stream of literature, based on structural VAR models, that concludes rather robustly for the effectiveness of discretionary fiscal policy in the short and long run.

Suggested Citation

  • Jérôme Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Working Papers hal-00973049, HAL.
  • Handle: RePEc:hal:wpaper:hal-00973049
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-00973049
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Of Old Ideas about Inequality and Growth
      by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-06 14:25:21
    2. Of Old Ideas about Inequality and Growth
      by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-06 14:25:21

    Citations

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    Cited by:

    1. Jean-Paul Fitoussi & Francesco Saraceno, 2010. "Inequality and macroeconomic performance," Working Papers hal-01069429, HAL.
    2. Jérôme Creel & Éloi Laurent & Jacques Le Cacheux, 2009. "L'Europe en crises," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 445-470.
    3. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2013. "Assessing future sustainability of french public finances," Sciences Po publications 2013-11, Sciences Po.
    4. Malcolm Sawyer, 2011. "Re-thinking Macroeconomic Policies," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 13, Edward Elgar Publishing.
    5. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09h95ai71so is not listed on IDEAS
    6. Jean-Paul Fitoussi & Francesco Saraceno, 2013. "European economic governance: the Berlin–Washington Consensus," Cambridge Journal of Economics, Oxford University Press, vol. 37(3), pages 479-496.
    7. Philip Arestis, 2013. "Economic theory and policy: a coherent post-Keynesian approach," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(2), pages 243-255.
    8. Jean-Paul Fitoussi & Eloi Laurent, 2009. "Macroeconomic and social policies in the EU 15: the last two decades," Sciences Po publications 2009-21, Sciences Po.
    9. repec:hal:spmain:info:hdl:2441/53r60a8s3kup1vc9k2c8h4u2h is not listed on IDEAS
    10. Jerome Creel & Paul Hubert & Francesco Saraceno, 2012. "An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework," Documents de Travail de l'OFCE 2012-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    11. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09j0h0g8tgo is not listed on IDEAS
    12. Christophe Blot & Jérôme Creel & Christine Rifflart & Danielle Schweisguth, 2009. "Petit manuel de stratégies de sortie de crise," SciencePo Working papers Main hal-01023657, HAL.
    13. repec:hal:spmain:info:hdl:2441/46mbanhapncmp6s9g2choh4pj is not listed on IDEAS
    14. Jean-Paul Fitoussi & Francesco Saraceno, 2009. "How Deep is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances," Documents de Travail de l'OFCE 2009-31, Observatoire Francais des Conjonctures Economiques (OFCE).
    15. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h469h02a5 is not listed on IDEAS
    16. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.
    17. Creel, Jérôme & Hubert, Paul & Saraceno, Francesco, 2013. "An assessment of the Stability and Growth Pact reform in a small-scale macro-framework," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1567-1580.
    18. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p5488g8pn is not listed on IDEAS

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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