The Automatic Stabilizers: Quietly Doing Their Thing
72 Pages Posted: 9 Mar 2000
Date Written: December 1999
Abstract
This paper presents theoretical and empirical analysis of automatic fiscal stabilizers, such as the income tax and unemployment insurance benefits. Using the modern theory of consumption behavior, we identify several channels -- insurance effects, wealth effects and liquidity constraints -- through which the optimal reaction of household consumption plans to aggregate income shocks is tempered by the automatic fiscal stabilizers. In addition we identify a cash flow channel for investment. The empirical importance of automatic stabilizers is addressed in several ways. We estimate elasticities of the various federal taxes with respect to their tax bases and responses of certain components of federal spending to changes in the unemployment rate. Such estimates are useful for analysts who forecast federal revenues and spending; the estimates also allow high- employment or cyclically-adjusted federal tax receipts and expenditures to be estimated. Using frequency domain techniques, we confirm that the relationships found in the time domain are strong at the business cycle frequencies. Using the FRB/US macro-econometric model of the United States economy, the automatic fiscal stabilizers are found to play a modest role at damping the short-run effect of aggregate demand shocks on real GDP, reducing the "multiplier" by about 10 percent. Very little stabilization is provided in the case of an aggregate supply shock.
Keywords: automatic stabilizers, high-employment budget, spectral analysis
JEL Classification: E62, H31, H6
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation
-
The Automatic Fiscal Stabilizers: Quietly Doing Their Thing
By Darrel S. Cohen and Glenn R. Follette
-
A Retrospective Evaluation of the Effects of Temporary Partial Expensing
By Darrel S. Cohen and Jason G. Cummins
-
Sustainability of Public Finances and Automatic Stabilisation Under a Rule of Budgetary Discipline
-
By Byron F. Lutz and Glenn R. Follette
-
By Glenn R. Follette and Byron F. Lutz
-
By Glenn R. Follette and Byron F. Lutz
-
Temporary Partial Expensing in a General-Equilibrium Model
By Jeremy B. Rudd and Rochelle M. Edge