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Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states

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  • Şen, Hüseyin
  • Kaya, Ayşe

Abstract

In this paper, we empirically explore the output-volatility reducing impact of automatic stabilizers and look in detail at their policy implications for selected EMU member states comprising Austria, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, and Spain for the period 1995–2017. Overall, the results suggest that automatic stabilizers deliver a statistically significant, but fairly weak, counter-effect on output volatility in the short run. More specifically, output-volatility responses to automatic stabilizers by a reduction between −0.012 and −0.097 percentage points depending on the proxy measure used for automatic stabilizers. However, the automatic stabilizing impact from taxes and government spending is statistically insignificant in the long run. The results point to two main policy implications: i) automatic stabilizers are an important fiscal mechanism just for the short-run output stabilization, but their output-volatility offsetting role and power are largely subject to proxy measures used for automatic stabilizers; ii) no matter what proxy measures are used, automatic stabilizers largely produce a weak stabilizing performance in dampening short-term output volatility. So, from a macroeconomic policy standpoint, it can be safely claimed that automatic stabilizers can just be an integral part of discretionary fiscal policy rather than being an alternative to it.

Suggested Citation

  • Şen, Hüseyin & Kaya, Ayşe, 2021. "Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states," Journal of Policy Modeling, Elsevier, vol. 43(6), pages 1388-1414.
    • Handle: RePEc:eee:jpolmo:v:43:y:2021:i:6:p:1388-1414
    DOI: 10.1016/j.jpolmod.2020.06.005
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    More about this item

    Keywords

    Fiscal policy; Automatic stabilizers; PMG estimator; EMU member states;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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