Joint estimates of automatic and discretionary fiscal policy: the OECD 1981-2003

Julia Darby and Jacques Melitz

No 1210, Heriot-Watt University Economics Discussion Papers from Department of Economics, School of Management and Languages, Heriot Watt University

Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981-2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.

Date: 2012
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Related works:
Working Paper: Joint estimates of automatic and discretionary fiscal policy: the OECD 1981-2003 (2012)
Working Paper: Joint Estimates of Automatic and Discretionary Fiscal Policy: the OECD 1981-2003 (2011)
Working Paper: Joint estimates of automatic and discretionary fiscal policy: the OECD 1981-2003 (2011)
Working Paper: Joint Estimates of Automatic and Discretionary Fiscal Policy: The OECD 1981-2003 (2011)
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