Automatic Stabilizers in an Economy with Multiple Shocks

Morten Spange ()

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A stochastic general equilibrium model is set up in order to analyse whether automatic stabilizers are a good tool in terms of mitigating risk. It is found that the potential benefits to be derived from automatic stabilizers depend on various factors including the degree of real wage rigidity and the size of the public sector. In countries with large public sectors automatic stabilizers in the sense of procyclical tax revenues can provide significant welfare improvements compared with a passive fiscal policy. For countries with smaller public sectors the predictions of the model are less favorable.

Keywords: Automatic stabilizers; Optimal fiscal policy; Real wage rigidity (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 22
Date: 2004-05-10
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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2004-3

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