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Fiscal Stabilization in the United States: Lessons for Monetary Unions

Plamen Nikolov () and Paolo Pasimeni

No 6/2019, BoF Economics Review from Bank of Finland

Abstract: The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and the experience of a monetary union equipped with fiscal shock absorbers, such as the United States, has often been a reference. This paper enhances our knowledge about the degree of macroeconomic stabilization achieved in the United States through the federal budget, providing a detailed breakdown of the different channels. In particular, we investigate the relative importance and stabilization impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. The analysis shows that in the United States, corporate income taxes collected at the federal level are the single-most efficient instrument for providing stabilization, given that even with a smaller size than other instruments they can provide important effects, mainly against common shocks. On the other hand, Social Security benefits and personal income taxes have a greater role in stabilizing asymmetric shocks. A federal system of unemployment insurance, then, can play an important stabilization role, in particular when enhanced by a discretionary program of extended benefits in the event of a large shock, like the Great Recession.

Keywords: Monetary Union; Macroeconomic Stabilization; Fiscal Policy; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E63 F36 F41 F45 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
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