Cyclical Stabilisation Under the Stability and Growth Pact: How Effective are Automatic Stabilisers?

36 Pages Posted: 10 Oct 2007

See all articles by Anne Brunila

Anne Brunila

Ministry of Finance, Finland

Marco Buti

European Commission, DG II

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2002

Abstract

It is widely recognised that fiscal policy will have greater responsibilities for cyclical stabilisation in the EMU, given the loss of the monetary instrument at national level. At the same time, the EMU's budgetary framework emphasises the need to rely on automatic fiscal stabilisers, rather than active policies, in cushioning the business cycle. We show that automatic stabilisers are relatively powerful in the event of a shock to private consumption, but less so as regards shocks to private investment and exports. In respect of supply side shocks, automatic stabilisers are largely ineffective, which may in fact be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation. Looking ahead, one of the challenges facing policy-makers will be how to design tax and welfare reforms which, while improving incentives and market functioning, do not stifle - and in fact could strengthen - the impact of automatic stabilisers.

Keywords: cyclical stabilisation, automatic stabilisers, Stability and Growth Pact

JEL Classification: E61, H62

Suggested Citation

Brunila, Anne and Buti, Marco and in 't Veld, Jan, Cyclical Stabilisation Under the Stability and Growth Pact: How Effective are Automatic Stabilisers? (March 18, 2002). Bank of Finland Research Discussion Paper No. 6/2002, Available at SSRN: https://ssrn.com/abstract=1020261 or http://dx.doi.org/10.2139/ssrn.1020261

Anne Brunila (Contact Author)

Ministry of Finance, Finland ( email )

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Marco Buti

European Commission, DG II ( email )

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Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

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