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The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers

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

Abstract

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.

Suggested Citation

  • Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers," IMF Working Papers 2003/182, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/182
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    Cited by:

    1. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia.
    2. AILINCA, Alina Georgeta, 2014. "Automatic Social Stabilizers What They Are And How They Function," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(3), pages 45-57.
    3. repec:zbw:bofrdp:2005_008 is not listed on IDEAS
    4. Jonas Fischer & Lars Jonung & Martin Larch, 2007. "101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey," European Economy - Economic Papers 2008 - 2015 267, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. Matti Virén, 2005. "Government size and output volatility: is there a relationship?," Macroeconomics 0508025, University Library of Munich, Germany.
    6. Felicity C Barker & Robert A Buckle & Robert W St Clair, 2008. "Roles of Fiscal Policy in New Zealand," Treasury Working Paper Series 08/02, New Zealand Treasury.
    7. Virén, Matti, 2005. "Government size and output volatility : is there a relationship?," Research Discussion Papers 8/2005, Bank of Finland.
    8. Antonio Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Public sector efficiency: evidence for new EU member states and emerging markets," Applied Economics, Taylor & Francis Journals, vol. 42(17), pages 2147-2164.
    9. Virén, Matti, 2005. "Government size and output volatility: is there a relationship?," Bank of Finland Research Discussion Papers 8/2005, Bank of Finland.
    10. Kashif Munir & Nimra Riaz, 2019. "Fiscal Policy and Macroecomonic Stability in South Asian Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 228(1), pages 13-33, March.
    11. Dinga, Emil & Ionescu, Cornel & Padurean, Elena, 2010. "Discretionary Policy versus Non-Discretionary Policy in the Economic Adjustment Process," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 184-207, December.
    12. S�verine Menguy, 2014. "Taxation Rates and Stabilization in the Framework of Supply-side Distortions," International Economic Journal, Taylor & Francis Journals, vol. 28(1), pages 95-120, March.

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    More about this item

    Keywords

    WP; government; nonwage government consumption; Fiscal Stabilizers; Business Cycle Volatility; Nonlinearity; government size; government strength variable; power indices; strength indicator; cyclical volatility; adjusted government expenditure; expenditure side; unadjusted government expenditure series; government expenditure side; wage government consumption; government strength indicator; Business cycles; Automatic stabilizers; Production growth; Europe;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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