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

Impact of Fiscal Policy Conference, p. 417, 2002

32 Pages Posted: 28 Jun 2012

See all articles by Anne Brunila

Anne Brunila

Ministry of Finance, Finland

Marco Buti

European Commission, DG II

Jan in’t Veld

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2002

Abstract

It is largely recognised that fiscal policy will have larger responsibilities for cyclical stabilisation in EMU given the loss of the monetary instrument. 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 shocks to private consumption, but less so in the case of shocks to private investment and exports. In the case of supply side shocks, the automatic stabilisers are largely ineffective, but this may actually be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation. As to the future, a challenge for policy-makers is how to design tax and welfare reforms which, while improving incentives and market functioning, do not stifle and possibly strengthen the impact of automatic stabilisers.

JEL Classification: E61, H6

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 21, 2002). Impact of Fiscal Policy Conference, p. 417, 2002, Available at SSRN: https://ssrn.com/abstract=2094434

Anne Brunila (Contact Author)

Ministry of Finance, Finland ( email )

P.O BOX 28
FIN-00023
Finland
+358 9 160 33191 (Phone)

Marco Buti

European Commission, DG II ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium
+32 2 296 2246 (Phone)
+32 2 299 3505 (Fax)

Jan In’t Veld

affiliation not provided to SSRN ( email )

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