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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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  1. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  2. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
  3. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
  4. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
  5. Barrell, R. & Pina, A.M., 2000. "How Important are Automatic Stabilizers in Europe? A Stochastic Simulation Assessment," Economics Working Papers eco2000/2, European University Institute.
  6. Artis, Michael J & Marcellino, Massimiliano & Proietti, Tommaso, 2003. "Dating the Euro Area Business Cycle," CEPR Discussion Papers 3696, C.E.P.R. Discussion Papers.
  7. Peter S. Heller, 2002. "Considering the IMF's Perspective on a "Sound Fiscal Policy"," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 141-, February.
  8. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
  9. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  10. Alesina, Alberto, et al, 1996. " Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
  11. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  12. Huber, Gerald & Kocher, Martin & Sutter, Matthias, 2003. " Government Strength, Power Dispersion in Governments and Budget Deficits in OECD-Countries: A Voting Power Approach," Public Choice, Springer, vol. 116(3-4), pages 333-50, September.
  13. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  14. Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers 1130, C.E.P.R. Discussion Papers.
  15. Alberto Alesina & Romain Wacziarg, 1997. "Openness, Country Size and the Government," NBER Working Papers 6024, National Bureau of Economic Research, Inc.
  16. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany.
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