Joint estimates of automatic and discretionary fiscal policy for the OECD

Julia Darby and Jacques Melitz

No 1122, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981-2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.

Keywords: Fiscal stabilization; automatic stabilizers; discretionary policy. (search for similar items in EconPapers)
JEL-codes: E62 H53 H62 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Joint estimates of automatic and discretionary fiscal policy for the OECD (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:str:wpaper:1122

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