Automatic Fiscal Stabilisers: What They Are and What They Do

• 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
• ISSN: 0923-7992; 1573-708X
• DOI: 10.1007/s11079-012-9260-6

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.