Automatic Stabilizers and Economic Crisis: Us vs. Europe

34 Pages Posted: 28 Jul 2009 Last revised: 24 Mar 2023

See all articles by Mathias Dolls

Mathias Dolls

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; IZA Institute of Labor Economics

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

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Abstract

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of 23 to 32 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view.

Keywords: automatic stabilization, fiscal stimulus, economic crisis, liquidity constraints

JEL Classification: E32, E63, H2, H31

Suggested Citation

Dolls, Mathias and Fuest, Clemens and Peichl, Andreas, Automatic Stabilizers and Economic Crisis: Us vs. Europe. IZA Discussion Paper No. 4310, Available at SSRN: https://ssrn.com/abstract=1439183 or http://dx.doi.org/10.2139/ssrn.1439183

Mathias Dolls (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

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IZA Institute of Labor Economics ( email )

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Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich ( email )

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

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Germany

Center for Economic Studies (CES) ( email )

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Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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