Automatic Stabilizers in an Economy with Multiple Shocks

Univ. of Aarhus Economics Working Paper No. 2004-03

25 Pages Posted: 18 Jun 2008

See all articles by Morten Spange

Morten Spange

Bank of England - Monetary Analysis

Date Written: October 5, 2004

Abstract

A stochastic general equilibrium model is set up in order to analyse whether automatic stabilizers are a good tool in terms of mitigating risk. It is found that the potential benefits to be derived from automatic stabilizers depend on various factors including the degree of real wage rigidity and the size of the public sector. In countries with large public sectors automatic stabilizers in the sense of procyclical tax revenues can provide significant welfare improvements compared with a passive fiscal policy. For countries with smaller public sectors the predictions of the model are less favorable.

Keywords: Automatic stabilizers, Optimal fiscal policy, Real wage rigidity

JEL Classification: E32, E62

Suggested Citation

Spange, Morten, Automatic Stabilizers in an Economy with Multiple Shocks (October 5, 2004). Univ. of Aarhus Economics Working Paper No. 2004-03, Available at SSRN: https://ssrn.com/abstract=1147563 or http://dx.doi.org/10.2139/ssrn.1147563

Morten Spange (Contact Author)

Bank of England - Monetary Analysis ( email )

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