Automatic Fiscal Stabilisers: What They Are and What They Do

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 stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by...

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Bibliographic Details
Published in:Open economies review 2013-02, Vol.24 (1), p.147-163
Main Authors: in’t Veld, Jan, Larch, Martin, Vandeweyer, Marieke
Format: Article
Language:English
Subjects:
Budgets
Consensus
Development Economics
Economic crisis
Economic development
Economic Policy
Economics
Economics and Finance
European Integration
Eurozone
Expenditures
Fiscal policy
GDP
Government spending
Gross Domestic Product
International Economics
International finance
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Monetary policy
Policy making
Research Article
Unemployment benefits
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Summary: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 stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilisers is crucial. While automatic stabilisers 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 stabilisers. This issue is addressed by defining two types of counterfactual budgets giving rise to two different interpretations about the nature of automatic stabilisation. Simulations with a structural model confirm that the degree of smoothing is conditional on how the counterfactual budget, i.e. the budget without automatic stabilisers, is defined.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-012-9260-6