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Fiscal Stabilization in the United States: Lessons for Monetary Unions

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  • Nikolov, Plamen
  • Pasimeni, Paolo

Abstract

The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and the experience of a monetary union equipped with fiscal shock absorbers, such as the United States, has often been a reference. This paper enhances our knowledge about the degree of macroeconomic stabilization achieved in the United States through the federal budget, providing a detailed breakdown of the different channels. In particular, we investigate the relative importance and stabilization impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. The analysis shows that in the United States, corporate income taxes collected at the federal level are the single-most efficient instrument for providing stabilization, given that even with a smaller size than other instruments they can provide important effects, mainly against common shocks. On the other hand, Social Security benefits and personal income taxes have a greater role in stabilizing asymmetric shocks. A federal system of unemployment insurance, then, can play an important stabilization role, in particular when enhanced by a discretionary program of extended benefits in the event of a large shock, like the Great Recession.

Suggested Citation

  • Nikolov, Plamen & Pasimeni, Paolo, 2019. "Fiscal Stabilization in the United States: Lessons for Monetary Unions," BoF Economics Review 6/2019, Bank of Finland.
  • Handle: RePEc:zbw:bofecr:62019
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    Cited by:

    1. Raffaele Fargnoli, 2020. "Adapting the EU Fiscal Governance to New Macroeconomics and Political Realities," RSCAS Working Papers 2020/03, European University Institute.

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    More about this item

    Keywords

    Monetary Union; Macroeconomic Stabilization; Fiscal Policy; Monetary Policy;
    All these keywords.

    JEL classification:

    • 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
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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