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Automatic Stabilisers and Market Flexibility in EMU: Is There A Trade-Off?

Author

Listed:
  • Marco Buti
  • Carlos Martinez-Mongay
  • Khalid Sekkat
  • Paul van den Noord

Abstract

It is often claimed that tax and welfare reforms that aim at enhancing efficiency may come at the cost of cyclical stabilisation. Reducing the generosity of welfare systems and lowering taxes may boost efficiency and output, and improve market adjustment to shocks. But, by reducing the size of automatic stabilisers, it may also imply less cyclical smoothing. This would be unwelcome in EMU given the loss of national monetary autonomy and the well-known pitfalls of active fiscal management. This paper argues that the alleged trade-off between efficiency/flexibility and stabilisation may not exist. We show that, if the initial level of the tax burden is high, reducing it may lead to higher output stabilisation in the event of a supply shock and higher inflation stabilisation in the event of a demand shock. The threshold level of taxation depends on the preferences of the central bank over inflation and output. Econometric and numerical simulations show that European countries — ... Stabilisateurs automatiques et flexibilité de marchés de l'UEM. Y-a-t-il un compromis ? On a souvent proclamé que les réformes fiscales et sociales ayant pour objectif d'augmenter l'efficacité économique pouvaient se faire au détriment de la stabilisation des cycles économiques. En effet, la réduction de la générosité des systèmes de sécurité sociale et l'abaissement des impôts tendent à accroître l'efficacité de l'activité économique et à améliorer la capacité d'ajustement des marchés aux chocs. Cependant, réduire la taille des stabilisateurs automatiques peut également impliquer une augmentation des oscillations cycliques. Cela serait contrariant au sein de l'UEM, étant donné la perte d'autonomie monétaire au niveau national, ainsi que les problèmes associés à l’activisme fiscal. Cet article établi que la contradiction potentielle entre efficacité/flexibilité et stabilisation peut ne pas exister. Nous montrons que, lorsque le niveau initial des prélèvements obligatoires est élevé, sa réduction peut renforcer la stabilisation de la production en réponse à un choc ...

Suggested Citation

  • Marco Buti & Carlos Martinez-Mongay & Khalid Sekkat & Paul van den Noord, 2002. "Automatic Stabilisers and Market Flexibility in EMU: Is There A Trade-Off?," OECD Economics Department Working Papers 335, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:335-en
    DOI: 10.1787/642866215738
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    Citations

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    Cited by:

    1. Anne Brunila & Marco Buti & Jan In 'T Veld, 2003. "Fiscal Policy in Europe: How Effective Are Automatic Stabilisers?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(1), pages 1-24, March.
    2. Torben M. Andersen, 2003. "Wage formation and European integration," European Economy - Economic Papers 2008 - 2015 188, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. repec:ebl:ecbull:v:5:y:2006:i:9:p:1-11 is not listed on IDEAS
    4. repec:ebl:ecbull:v:5:y:2006:i:4:p:1-8 is not listed on IDEAS
    5. Raphaël Espinoza, 2007. "Les stabilisateurs automatiques en France," Économie et Prévision, Programme National Persée, vol. 177(1), pages 1-17.
    6. Iain Begg & Waltraud Schelkle, 2004. "Can Fiscal Policy Co‐ordination be Made to Work Effectively?," Journal of Common Market Studies, Wiley Blackwell, vol. 42(5), pages 1047-1059, December.
    7. Schalck, Christophe, 2006. "Coordination des Politiques Budgétaires dans une Union Monétaires Hétérogène: Modélisation et Application à l'UEM Coordination of Budgetary Policies in a Heterogeneous Monetary Union: Modelisation and," MPRA Paper 1435, University Library of Munich, Germany.
    8. Christophe Schalck, 2006. "EMU's Fiscal Rules and Economic Stabilization," Economics Bulletin, AccessEcon, vol. 5(4), pages 1-8.
    9. Jan Veld & Martin Larch & Marieke Vandeweyer, 2013. "Automatic Fiscal Stabilisers: What They Are and What They Do," Open Economies Review, Springer, vol. 24(1), pages 147-163, February.
    10. Christophe Schalck, 2006. "The stability Pact and the coordination of fiscal policies in the EMU," Economics Bulletin, AccessEcon, vol. 5(9), pages 1-11.
    11. Marco Buti & Carlos Martinez-Mongay & Khalid Sekkat & Paul van den Noord, 2003. "Automatic Fiscal Stabilisers in EMU: A Conflict between Efficiency and Stabilisation?," CESifo Economic Studies, CESifo Group, vol. 49(1), pages 123-140.
    12. repec:bla:jcmkts:v:45:y:2007:i::p:81-103 is not listed on IDEAS
    13. Andrew Williams, 2014. "The effect of transparency on output volatility," Economics of Governance, Springer, vol. 15(2), pages 101-129, May.
    14. Schalck, Christophe, 2006. "Règles Budgétaires et Gestion du Policy-Mix dans l'UEM Budgetary Rules and Management of the Policy-Mix in the UME," MPRA Paper 1434, University Library of Munich, Germany, revised Oct 2006.
    15. Kotilainen, Markku, "undated". "Economic Shocks, Progressiveness of Taxation, and Indexation of Taxes and Public Expenditure in EMU," Discussion Papers 1011, The Research Institute of the Finnish Economy.
    16. Sébastien Pommier, 2004. "Évolutions et asymétries des règles européennes de politique budgétaire et mise en oeuvre du Pacte de stabilité," Économie et Prévision, Programme National Persée, vol. 162(1), pages 95-109.
    17. Volker Ziemann, 2013. "Do Structural Policies Affect Macroeconomic Stability?," OECD Economics Department Working Papers 1075, OECD Publishing.
    18. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ. Revista vasca de Economía, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.

    More about this item

    Keywords

    automatic stabilisers; choc; Economic and Monetary Union; fiscal policy; politique fiscale; shocks; stabilisateurs automatiques; Union économique et monétaire;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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