The tradeoff between efficiency and macroeconomic stabilization in Europe

Carlos Martinez-Mongay and Khalid Sekkat

No 05-04.RS, DULBEA Working Papers from ULB -- Universite Libre de Bruxelles

Abstract: The paper contributes to the debate on the stability/efficiency tradeoff of automatic stabilizers. A simple AD-AS two countries model is presented and illustrates circumstances where a reduction in taxes can foster stabilization. The testable implication from the model is that tax cuts can either increase or decrease volatility depending on the structure of the taxation system. Hence, lowering taxes for efficiency purposes may not cost in terms of stabilization. This implication is tested on a sample of 25 OECD countries over the period 1960-1999 taking account of the endogeneity and omitted variables issues identified in the literature. We found acceptably robust evidence that the size of governments in OECD countries has played a stabilizing role for both output and inflation. However, the relationship between government size and macroeconomic stability is not linear. The composition of public finances, in particular the tax mix, matters for output and price volatility. Distorting taxes, namely taxes on labor and capital, might have negative effects on macroeconomic stability. Consequently, the potential trade off between stability and flexibility might not exist.

Keywords: Automatic stabilizers; efficiency; Europe (search for similar items in EconPapers)
Pages: 34 p.
Date: 2005-02
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Published by: DULBEA - Université libre de Bruxelles, Bruxelles

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/7448/1/ks-0076.pdf ks-0076 (application/pdf)

Related works:
Working Paper: The Tradeoff between Efficiency and Macroeconomic Stabilization in Europe (2010)
Working Paper: The tradeoff between efficiency and macroeconomic stabilization in Europe (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dul:wpaper:05-04rs

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... .ulb.ac.be:2013/7448

Access Statistics for this paper

More papers in DULBEA Working Papers from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().