Fiscal Stabilization in the United States: Lessons for Monetary Unions

Plamen Nikolov and Paolo Pasimeni

Open Economies Review, 2023, vol. 34, issue 1, No 5, 113-153

Abstract: Abstract The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and its relevance has suddenly increased further, after the recent Covid-19 shock. The analysis of fiscal stabilization in the United States, a monetary union equipped with a common fiscal capacity, has often informed the literature on the European EMU and could serve as a reference for its possible future reforms. This paper expands that literature in three ways: first, by measuring stabilization not only as inter-state risk-sharing of asymmetric shocks, but also as intertemporal stabilization of common shocks; second, by doing this for specific items in the US federal budget, both on the revenue and on the expenditure side; and third, by also measuring the impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. Corporate and personal income tax, on the revenue side, and social security benefits and federal grants, on the spending side, are the most effective items. The US federal system of unemployment insurance provides great stabilization in the event of a large shock, in particular when enhanced by the discretionary program of extended benefits. These findings imply that a proper design of the budget can maximize its stabilization effect, when it helps bridging the gap between higher mobility of capital and lower mobility of labor, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).

Keywords: Monetary Union; Macroeconomic Stabilization; Fiscal Policy; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E63 F36 F41 F45 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Fiscal Stabilization in the United States: Lessons for Monetary Unions (2019)
Working Paper: Fiscal Stabilization in the United States: Lessons for Monetary Unions (2019)
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DOI: 10.1007/s11079-022-09664-8

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