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The Fiscal Smile; The Effectiveness and Limits of Fiscal Stabilizers

  • Maria Antoinette Silgoner
  • Jesús Crespo-Cuaresma
  • Gerhard Reitschuler

We study the smoothing impact of fiscal stabilizers (proxied by government expenditures or revenues) on business cycle volatility for a panel of EU countries in the period 1970-99. The results show that the business cycle volatility smoothing effect of fiscal stabilizers may revert at high levels. We present evidence that for government expenditure ratios exceeding an estimated value of about 38 percent, a further expansion in the size of the government could actually lead to an increase in cyclical volatility. This may call for a reconsideration of the use of fiscal stabilizers for business cycle smoothing.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/182.

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Length: 30
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/182
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  10. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany.
  11. Michael ARTIS & Massimiliano MARCELLINO & Tommaso PROIETTI, 2002. "Dating the Euro Area Business Cycle," Economics Working Papers ECO2002/24, European University Institute.
  12. Barrell, Ray & Pina, Alvaro M., 2004. "How important are automatic stabilisers in Europe? A stochastic simulation assessment," Economic Modelling, Elsevier, vol. 21(1), pages 1-35, January.
  13. Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers 1130, C.E.P.R. Discussion Papers.
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