Automatic stabilizers fiscal policy2/18/2023 ![]() ![]() To circumvent the problem of endogeneity, we follow the approach of Auerbach and Feenberg ( 2000) and Dolls et al. ![]() Footnote 1 However, these variables are endogenous to changes in household incomes as tax payments decrease (for a given progressive tax system) or (unemployment) benefits increase when households earn lower incomes or become unemployed. Traditional approaches based on macro data typically used aggregate variables on government revenue and spending as proxies for automatic stabilizers. 2013 Di Maggio and Kermani 2016) or structural models (McKay and Reis 2016). Previous work on automatic stabilizers has mostly relied on macro data (see, e.g., Fatás and Mihov 2001 in’t Veld et al. ![]() In this situation the right balance between fiscal support for the economy and fiscal consolidation is again of key importance (McKay and Reis 2016 Blanchard and Summers 2020).Īutomatic stabilizers are those elements of the tax and transfer system that mitigate fluctuations in output without discretionary government action. In the post-COVID-19 recovery, public debt levels have risen again all throughout Europe, and monetary policy is near or at the zero lower bound. This paper is the first to investigate the effects of fiscal expansions during the Great Recession and subsequent fiscal consolidation measures (often labeled “austerity”) in Europe on automatic stabilizers. Tax increases and spending cuts aimed at reducing soaring government budget deficits, but in many cases they exacerbated losses in household incomes, undermining fiscal stabilization effects. The Great Recession and the resulting sovereign debt crisis in Europe have caused many countries to take fiscal consolidation measures. ![]()
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