Research Discussion Papers, Bank of Finland
Anne Brunila, Marco Buti and Jan in't Veld
Cyclical stabilisation under the Stability and Growth Pact: How effective are automatic stabilisers?
Abstract: It is widely recognised that fiscal policy will have
greater responsibilities for cyclical stabilisation in the EMU, given the
loss of the monetary instrument at national level. At the same time, the
EMU’s budgetary framework emphasises the need to rely on automatic fiscal
stabilisers, rather than active policies, in cushioning the business cycle.
We show that automatic stabilisers are relatively powerful in the event of
a shock to private consumption, but less so as regards shocks to private
investment and exports. In respect of supply side shocks, automatic
stabilisers are largely ineffective, which may in fact be a good thing to
the extent that supply-side disturbances call for structural adjustment
rather than cyclical stabilisation. Looking ahead, one of the challenges
facing policy-makers will be how to design tax and welfare reforms which,
while improving incentives and market functioning, do not stifle – and in
fact could strengthen – the impact of automatic stabilisers.
Keywords: cyclical stabilisation; automatic stabilisers; Stability and Growth Pact; (follow links to similar papers)
JEL-Codes: E61; H62; (follow links to similar papers)
36 pages, March 18, 2002
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