Fiscal Consolidation and Automatic Stabilization: New Results

54 Pages Posted: 23 Jan 2020

See all articles by Mathias Dolls

Mathias Dolls

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; IZA Institute of Labor Economics

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

CESifo (Center for Economic Studies and Ifo Institute)

Christian Wittneben

ZEW – Leibniz Centre for European Economic Research

Date Written: 2019

Abstract

We analyze how the combined effect of automatic stabilizers and discretionary changes in tax-benefit systems have affected the cushioning of income shocks in the Euro zone and the EU-27 in the period 2007–2014. We propose a new summary measure of the combined effect of automatic stabilizers and discretionary policy changes based on micro data and counter-factual simulation. Discretionary fiscal policy supported the effects of automatic stabilizers in the years 2008 and 2009 but then became much more restrictive. For the Euro zone as a whole, the share of income shocks absorbed by the tax and transfer system declined from 48 percent in 2008 to 24 percent in 2011. For some of the countries most affected by the crisis, the stabilization effect was even negative in some years of the crisis, implying that the tax and transfer system amplified income shocks. We also compare our measure of stabilization to estimates based on macro data.

Keywords: automatic stabilizers, fiscal consolidation, fiscal policy

JEL Classification: E630, E620, H310

Suggested Citation

Dolls, Mathias and Fuest, Clemens and Peichl, Andreas and Wittneben, Christian, Fiscal Consolidation and Automatic Stabilization: New Results (2019). CESifo Working Paper No. 8021, Available at SSRN: https://ssrn.com/abstract=3523525

Mathias Dolls (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

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Munich, 01069
Germany

HOME PAGE: http://www.cesifo-group.de/ifoHome/CESifo-Group/ifo/ifo-Mitarbeiter/cvifo-dolls_m.html

IZA Institute of Labor Economics ( email )

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Germany

Clemens Fuest

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

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

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Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Andreas Peichl

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Christian Wittneben

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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