Automatic stabilizers, fiscal rules and macroeconomic stability

Javier Andrés () and Rafael Domenech ()

No 314, Banco de España Working Papers from Banco de España

Abstract: This paper analyzes the effect of the fiscal structure upon the trade-off between inflation and output stabilization in the presence of technological shocks in a DGE model with nominal and real rigidities. The model reproduces the main features of European economies and it integrates a rich menu of fiscal variables as well as a target on the debt to output ratio. The main result of this paper is that distortionary taxes tend to increase output volatility relative to lump-sum taxes unless substantial rigidities are present. We explore in detail the mechanisms that generate such a result, and the conditions under which the supply-side effects of distortionary taxes and the procyclical behaviour of public spending induced by fiscal rules prevail over the conventional effect of automatic stabilizers operating through disposable income.

Keywords: Fiscal rules; macroeconomic stability; distortionary taxes (search for similar items in EconPapers)
JEL-codes: E32 E52 E63 (search for similar items in EconPapers)
Date: 2003-10
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Related works:
Journal Article: Automatic stabilizers, fiscal rules and macroeconomic stability (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:bde:wpaper:0314

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