Automatic Stabilisation, Discretionary Policy and the Stability Pact

Jerome Creel and Francesco Saraceno

No 2008-15, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: This paper describes recent trends on the efficiency of stabilisers in the European Union. Using both macro evidence on the cyclical sensitivity of budget deficit to economic activity, and micro evidence on the tax and expenditure profiles, we conclude, in agreement with the recent literature, that the importance of automatic stabilisation has decreased. After remarking that this trend is contradictory with the current economic institutions of Europe relying exclusively on automatic stabilisation for the conduct of fiscal policy, we argue that increasing flexibility, one alternative way to reduce cyclical fluctuations, does not seem a viable path. The paper concludes defending the appropriateness of discretionary fiscal policy. We argue by means of a simple model that the theoretical arguments against its use are not conclusive, and we describe a recent stream of literature, based on structural VAR models, that concludes rather robustly for the effectiveness of discretionary fiscal policy in the short and long run.

Keywords: Automatic stabilisers; progressivity; unemployment benefits; discretionary fiscal policy; European fiscal institutions (search for similar items in EconPapers)
JEL-codes: E60 H20 H30 H60 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Automatic Stabilisation, Discretionary Policy and the Stability Pact (2008)
Working Paper: Automatic Stabilisation, Discretionary Policy and the Stability Pact (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:0815

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