Theoretical Considerations Regarding the Automatic Fiscal Stabilizers Operating Mechanism (original) (raw)

Automatic Fiscal Stabilizers vs . Discretionary Fiscal Policy : Challenges and Policy Options

2013

This paper examine the role of Automatic Fiscal Stabilizers for stabilizing the cyclical fluctuations of macroeconomic output as an alternative to discretionary fiscal policy. Based on the literature in the field, this paper points out the disadvantages of fiscal discretionary policy and argue the need of using Automatic Fiscal Stabilizers in order to provide a faster decision making process, shielded from political interference, and reduced uncertainty for households and business environment. The paper presents some features of AFS operating mechanism and also identifies and systematizes the factors which provide its importance and national individuality. The paper argue the need for continued precaution in the use of discretionary policy, deep concern for implementation of Automatic Fiscal Stabilizers, the objective of making automatic stabilizers more effective and the integration of better measures of fiscal balance into the discretionary policy process. The objectives of the st...

Automatic Fiscal Stabilisers: What they are and what they do

2012

The global financial and economic crisis has revived the debate in the academic literature and in policy circles about the size and effectiveness of automatic fiscal stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilisers is crucial.

Fiscal Policy and its role in ensuring economic stability

2010

The State, irrespective of its institutional nature and contents throughout history, has been the most important answer or, better said, the best-structured solution of society members to the issues of their world's complexity. Processes such as globalization and integration, individuals' increasing reliance upon technology, limited vital resources in order to ensure normal life, social polarization growth, poverty augmentation, migrating flows, occurrence of diseases that can rapidly spread at world level-all the above increase the complexity of our world and make the State's economic involvement compulsory. In this respect, an important role is held by the fiscal system, originally created to meet strictly financial goals of the State but subsequently enriched by various economic and social objectives due to the development of human society. Fiscality can be viewed as a prerequisite to compensate gaps and for a genuine European policy of economic growth. The impact of fiscality upon society members in every economy is significant, with tax payers' acceptance or refusal having a major effect upon the State's intervention by typical means in the entire activity of a society. The paper suggests a analysis of fiscality in Romania. Romania suffers from the lack of "self-image" and the factors generating it are also to be found in the present paper.

Automatic Fiscal Stabiliser: Make it happen

The eurozone crisis triggered a whole new series of innovations in EU economic governance in order to make the Union more resilient for the next economic downswing. But one of the more persistent issues are the socio-economic divergences between member states, identified by the Five Presidents’ Report as a major problem in the functioning of the Economic and Monetary Union (EMU). Debates took place in recent years about automatic stabilisers, and more specifically about the possibility of introducing an unemployment insurance within the EMU. While the need for some form of fiscal risk-sharing has become a dominant view in expert circles, there has been much less progress among the main political parties and stakeholders. In this study, Regula Hess and László Andor analyse the political feasibility of the adoption of an automatic fiscal stabiliser (AFS) for the eurozone by evaluating actors’ positions towards three distinctive proposals: 1) cyclical shock insurance, 2) reinsurance, 3) a European basic unemployment insurance; they included an empirical case study of France and Germany as the most relevant players within the intergovernmental bargaining constellation. Although the authors realise the current political context makes the adoption of an AFS improbable, Hess and Andor encourage stakeholders to further pursue the discussion, as windows of opportunities can open at any time, and even give some suggestions on what the parameters of the most feasible proposal might be.

Fiscal Policy in Europe: How Effective Are Automatic Stabilisers?

Empirica, 2003

It is largely recognised that fiscal policy will have largerresponsibilities for cyclicalstabilisation in EMU given the loss of the monetary instrument.At the same time, theEMU's budgetary framework emphasises the need to rely onautomatic fiscal stabilisers,rather than active policies in cushioning the business cycle.We show that automaticstabilisers are relatively powerful in the event of shocksto private consumption, but lessso in the

Automatic stabilizers, fiscal rules and macroeconomic stability

European Economic Review, 2006

This paper analyzes the e¤ect of the …scal structure upon the trade-o¤ between in ‡ation and output stabilization in the presence of technological shocks in a DGE model with nominal and real rigidities. The model reproduces the main features of European economies and it integrates a rich menu of …scal variables as well as a target on the debt to output ratio. The main result of this paper is that distortionary taxes tend to increase output volatility relative to lump-sum taxes unless substantial rigidities are present. We explore in detail the mechanisms that generate such a result, and the conditions under which the supply-side e¤ects of distortionary taxes and the procyclical behaviour of public spending induced by …scal rules prevail over the conventional e¤ect of automatic stabilizers operating through disposable income.

The impact of national fiscal rules on the stabilisation function of fiscal policy

European Journal of Political Economy, 2015

We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985-2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of both output and inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, probably because of the higher importance of central banks in that respect.

Fiscal Rules and Macroeconomic Stability

2006

In this paper we analyze the impact of fiscal rules on the effectiveness of fiscal policy as a macroeconomic stabilizing instrument. First, we review the available evidence on the effects of fiscal policy to affect output in the short run and real interest rates and investment and growth in the long run, and we show how the use of fiscal rules has proved useful in restraining debt and deficits. Secondly, we discuss whether debt consolidation rules trade off higher output instability in exchange for lower deficits, using three alternative representations of the intertemporal substitution mechanism in a SDGE framework. Our main conclusion is that both the impact of discretionary fiscal policy and the strength of automatic stabilizers are largely unaffected by the 'tightness' of these rules. Therefore, there is nothing in the design of fiscal rules aimed at preventing huge and long-lasting deviations of debt from the steady state level, which makes them an impediment to fiscal policy carrying out its job as a significant stabilizing policy instrument.