The objectives of the study are the identification of the general features of the concept of automatic fiscal stabilizers and the logical assessment of them from economic perspectives. This paper examines the role of Automatic Fiscal Stabilizers (AFS) for stabilizing the cyclical fluctuations of macroeconomic output as an alternative to discretionary fiscal policy, admitting its huge potential of being an anti crisis solution. In some cases, an incoming government of a different political color pursued consolidation. More than half of the governments that had started consolidation were re-elected, and some even strengthened consolidation efforts after then. With regard to political economy, most consolidation episodes were implemented shortly after an election. Interest rates started to decline two years after consolidation had started, suggesting that it took some time to earn credibility. Most episodes started on a basis of improving competitiveness following currency depreciation and, in turn, favorable growth prospects, closing output gaps and – with some lag – falling unemployment. Results suggest that successful consolidation – as measured by deficit reduction and debt stabilization or decline – was driven by spending cuts and to a lesser extent by revenue increases. It reviews how fiscal policy variables evolved during these episodes, how consolidation was influenced by the wider economic environment, and how the political economy side helped trigger and sustain consolidation efforts. Where B is the outstanding debt and figures are in nominal terms.This paper provides an analysis of large and sustained fiscal consolidation episodes in OECD countries implemented between 19. There has been a question about the impact of the multiplier since the GFC.
One major area of debate for short-term stabilising policy is the power of the multiplier.
Medium-term and long-term polices are usually called Supply-side policies. This chapter is about the business cycle and the short run. These can be short-run, medium-run and long-run. It can be divided into different time frames. Discretionary fiscal policy is deliberate action on top of that.
The automatic stabiliser is the way that fiscal policy counteracts the business cycle: taxes rise and government spending is reduced during a boom and the tax-take is reduced while spending on benefits and health are likely to rise in a recession. The government may intervene to implement political choices. There are substantial differences in the level of redistribution that is carried out under the tax and benefit system. It can be used as a way to redistribute income, it can be used for resource allocation, externalities and it can be used to provide public goods. Automatic stabilisers and discretionary policy are the two ways that fiscal action can affect the economy.įiscal policy is also important in the microeconomic sphere. Fiscal policy has an influence on the government deficit and government debt. Though monetary policy is the preferred macroeconomic tool under the standard policy framework, fiscal polish is important because it can operate when monetary police is less effective (when at the lower bound for example), fiscal policy can act as an automatic stabiliser. The role of fiscal policy, automatic stabilisers and discretionary policy 13.1 The monetary transmission mechanismīy the end of this chapter you should understand:.12.3 Eurozone governance, sovereign risk and banking.8.5 Schumpeterian growth: the Aghion-Howitt model.7.3 The GFC compared to the Great Depression.7.1 Pre-crisis system: incentives, instruments and actors.6.4 Financial Accelerator and balance sheet recessions.6.2 Financial crisis and the business cycle.5 Money, Banking and the Financial Sector.2.5 The labour market and the business cycle.2.3 Changes in equilibrium unemployment.