Chapter 19: Assessing the smoothing impact of automatic stabilizers – evidence from Europe
Jesús Crespo-Cuaresma, Gerhard Reitschuler and Maria Antoinette Silgoner1 1. INTRODUCTION One of the subjects of major interest in European public ﬁnance is the discussion on the use of automatic stabilizers and their ‘superiority’ as compared to discretionary ﬁscal policy, which has often been responsible for increased cyclical volatility in the past three decades. The preference in European policy circles for automatic stabilizers becomes clear when reading the Stability and Convergence Programmes: the main goal set out here implies that countries should reach a budgetary position ‘close to balance or in surplus’. This would mean that the automatic stabilizers would be allowed to play fully and symmetrically over the business cycle and at the same time not breach the 3 per cent deﬁcit criterion of the Maastricht Treaty. By following this strategy, it is argued, cyclical volatility could be signiﬁcantly reduced because automatic stabilizers are – by deﬁnition – anticyclical. However, the operation of automatic stabilizers is not only propagated at European policy levels (such as the European Commission); oﬃcial documents of other international institutions such as the OECD or the IMF also recommend their full operation (see for example OECD, 2001 and Heller, 2002). Apparently, there seems to be a general consensus that automatic stabilizers are eﬀective. To our mind, however, the hypothesis of the eﬀectiveness of automatic stabilizers is all but obvious. Rather several questions arise. First of all: which eﬀect do we expect ﬁscal stabilizers to have on the economy? According to...
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