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Consumption Smoothing through Fiscal Policy in OECD and EU Countries

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Author Info
Adriana Arreaza
Bent E. Sorensen
Oved Yosha

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Abstract

We measure the amount of smoothing achieved through various components of the government deficit in EU and OECD countries. For EU countries, at the 1-year frequency percent of shocks to GDP are smoothed via government consumption, 18 percent via transfers percent via subsidies, while taxes provide no smoothing. The results for OECD countries are similar. Government transfers provide more smoothing of negative than of positive shocks among EU countries. There seems to be no trade-off between high government deficits in a country and the ability to smooth consumption. We find that in countries where there is delegation' of power or where fiscal targets are negotiated effectively by coalition members consumption smoothing via government consumption and government transfers is considerably higher. We interpret this finding as evidence that effective budgetary institutions can accomplish efficient consumption smoothing via government deficit spending and lower average deficits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6372.

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Date of creation: Jan 1998
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Handle: RePEc:nbr:nberwo:6372

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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  1. Mark Hallerberg & Rolf Strauch & Jürgen von Hagen, 2006. "The design of fiscal rules and forms of governance in European Union countries," Discussion Papers 150, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  2. Fabiana Rocha, 2007. "Política Fiscal Através Do Ciclo E Operação Dos Estabilizadores Fiscais," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 011, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  3. Fabiana Rocha & Ana Carolina Giuberti, 2006. "Assimetria Cíclica Na Política Fiscal Dos Estados Brasileiros," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 52, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  4. António Afonso & Davide Furceri, 2007. "Business cycle synchronization and insurance mechanisms in the EU," Working Paper Series 844, European Central Bank. [Downloadable!]
    Other versions:
  5. Christos Koulovatianos & Leonard J. Mirman, 2005. "Endogenous Public Policy and Long-Run Growth: Some Simple Analytics," Vienna Economics Papers 0502, University of Vienna, Department of Economics. [Downloadable!]
  6. Artis, Michael J & Buti, Marco, 2000. ""Close to Balance or in Surplus": A Policy Maker's Guide to the Implementation of the Stability and Growth Pact," CEPR Discussion Papers 2515, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Christos Koulovatianos & Leonard J. Mirman, 2004. "Endogenous Public Policy and Long-Run Growth," University of Cyprus Working Papers in Economics 2-2004, University of Cyprus Department of Economics. [Downloadable!]
  8. Darby, Julia & Mélitz, Jacques, 2007. "Labour Market Adjustment, Social Spending and the Automatic Stabilizers in the OECD," CEPR Discussion Papers 6230, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Miguel Braun & Luciano di Gresia, 2003. "Hacia un sistema de seguro social eficaz en América Latina: la importancia de una política fiscal anticíclica," RES Working Papers 4334, Inter-American Development Bank, Research Department. [Downloadable!]
  10. Claudia M. Buch & Joerg Doepke & Christian Pierdzioch, 2002. "Consumer Preferences and the Reliability of Euler Equation Tests of Capital Mobility — Some Simulation-Based Evidence," Kiel Working Papers 1131, Kiel Institute for the World Economy. [Downloadable!]
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  12. Peter Claeys, 2005. "Policy Mix and Debt Sustainability: Evidence from Fiscal Policy Rules," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  13. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics. [Downloadable!]
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  14. Miguel Braun & Luciano di Gresia, 2003. "Towards Effective Social Insurance in Latin America: The Importance of Countercyclical Fiscal Policy," RES Working Papers 4333, Inter-American Development Bank, Research Department. [Downloadable!]
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