Automatic Stabilizers and Economic Crisis: Us vs. Europe

48 Pages Posted: 24 Aug 2010 Last revised: 26 Sep 2010

See all articles by Mathias Dolls

Mathias Dolls

University of Cologne - Faculty of Management, Economics and Social Sciences; IZA

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)

Date Written: August 2010

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 47 percent 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 up to 30 per cent in the EU and up to 20 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.

Suggested Citation

Dolls, Mathias and Fuest, Clemens and Peichl, Andreas, Automatic Stabilizers and Economic Crisis: Us vs. Europe (August 2010). NBER Working Paper No. w16275. Available at SSRN: https://ssrn.com/abstract=1662269

Mathias Dolls (Contact Author)

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Richard-Strauss-Str. 2
Cologne, D-50923
Germany

IZA

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Germany

HOME PAGE: http://www.iza.org/

Clemens Fuest

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

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Germany
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Ludwig-Maximilians-University, Munich ( email )

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Germany

Center for Economic Studies (CES) ( email )

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Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

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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