The Crisis, Automatic Stabilisation, and the Stability Pact
DOI:
https://doi.org/10.55444/2451.7321.2010.v48.n1.3871Keywords:
automatic stabilisers, tax progressivity, unemployment benefits, discretionary fiscal policy, European fiscal institutions , Stability and Growth PactAbstract
This paper develops a comprehensive description of recent trends on the effectiveness of automatic stabilisers in the European Union, using both macro evidence on the cyclical sensitivity of budget deficits to economic activity and micro evidence on the tax and expenditure profi les. We conclude that there is increasing evidence of the declining importance of the automatic stabilisation. This points to a fundamental contradiction in the European Stability and Growth Pact, that relies almost exclusively on automatic stabilisation for the conduct of fi scal policy, We also argue, on the basis of past experience, that further increasing market fl exibility does not seem a viable path to reduce aggregate fluctuations. The paper concludes by highlighting the complex relation between discretionary policies and automatic stabilisation.
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