Fiscal Policy and Macroeconomic Stability: Automatic Stabilizers Work, Always and Everywhere

47 Pages Posted: 4 Jun 2010

See all articles by Xavier Debrun

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Radhicka Kapoor

London School of Economics & Political Science (LSE)

Date Written: May 2010

Abstract

The paper revisits the link between fiscal policy and macroeconomic stability. Two salient features of our analysis are (1) a systematic test for the government’s ambivalent role as a shock absorber and a shock inducer - removing a downward bias present in existing estimates of the impact of automatic stabilizers - and (2) a broad sample of advanced and emerging market economies. Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers. Also, the destabilizing impact of policy changes not systematically related to the business cycle may not be as robust as suggested in the literature.

Keywords: Economic models, Economic stabilization, Fiscal policy, Fiscal stability

Suggested Citation

Debrun, Xavier and Kapoor, Radhicka, Fiscal Policy and Macroeconomic Stability: Automatic Stabilizers Work, Always and Everywhere (May 2010). IMF Working Paper No. 10/111, Available at SSRN: https://ssrn.com/abstract=1620245

Xavier Debrun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8321 (Phone)
202-623-6343 (Fax)

Radhicka Kapoor

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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