Automatic Fiscal Stabilisers: What They Are and What They Do

VIVES Discussion Paper No. 29

23 Pages Posted: 7 Aug 2012

See all articles by Jan in 't Veld

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Martin Larch

European Fiscal Board

Marieke Vandeweyer

KU Leuven. Faculty of Business and Economics (FBE)

Date Written: 2012

Abstract

The global financial and economic crisis has revived the debate in the academic literature and in policy circles about the size and effectiveness of automatic fiscal stabilizers. Especially in the euro area where monetary policy is centralized and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilizers is crucial. While automatic stabilizers are a fairly established concept in the fiscal policy literature, there is still no consensus about their actual nature and their effectiveness. This paper shows that differences in opinion mirror a deeper disagreement over how the budget would look like without automatic stabilizers. This issue is addressed by defining two types of counterfactual budgets giving rise to two different interpretations about the nature of automatic stabilization. Simulations with a structural model confirm that the degree of smoothing is conditional on how the counterfactual budget, i.e. the budget without automatic stabilizers, is defined.

Keywords: automatic stabilizers, budget balance, output smoothing, model simulation

JEL Classification: H6, H30, E37, E62

Suggested Citation

in 't Veld, Jan and Larch, Martin and Vandeweyer, Marieke, Automatic Fiscal Stabilisers: What They Are and What They Do (2012). VIVES Discussion Paper No. 29, Available at SSRN: https://ssrn.com/abstract=2125796 or http://dx.doi.org/10.2139/ssrn.2125796

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

CHAR 14/245
Brussels, Bruxelles B-1049
Belgium
(32 2) 2993 577 (Phone)
(32 2) 2957 499 (Fax)

Martin Larch (Contact Author)

European Fiscal Board ( email )

Belgium
0032 2 2969244 (Phone)

Marieke Vandeweyer

KU Leuven. Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
52
Abstract Views
537
rank
414,774
PlumX Metrics