The automatic fiscal stabilizers: quietly doing their thing

Darrel Cohen and Glenn Follette

No 1999-64, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper presents theoretical and empirical analysis of automatic fiscal stabilizers, such as the income tax and unemployment insurance benefits. Using the modern theory of consumption behavior, we identify several channels--insurance effects, wealth effects and liquidity constraints- -through which the optimal reaction of household consumption plans to aggregate income shocks is tempered by the automatic fiscal stabilizers. In addition we identify a cash flow channel for investment. The empirical importance of automatic stabilizers is addressed in several ways. We estimate elasticities of the various federal taxes with respect to their tax bases and responses of certain components of federal spending to changes in the unemployment rate. Such estimates are useful for analysts who forecast federal revenues and spending; the estimates also allow high- employment or cyclically-adjusted federal tax receipts and expenditures to be estimated. Using frequency domain techniques, we confirm that the relationships found in the time domain are strong at the business cycle frequencies. Using the FRB/US macro-econometric model of the United States economy, the automatic fiscal stabilizers are found to play a modest role at damping the short-run effect of aggregate demand shocks on real GDP, reducing the \"multiplier\" by about 10 percent. Very little stabilization is provided in the case of an aggregate supply shock.

Keywords: Economic stabilization; Business cycles (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/1999/199964/199964abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/1999/199964/199964pap.pdf (application/pdf)

Related works:
Journal Article: The automatic fiscal stabilizers: quietly doing their thing (2000)
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:fip:fedgfe:1999-64

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().