Working Paper: CEPR ID: DP8342
Authors: Julia Darby; Jacques Melitz
Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981-2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.
Keywords: automatic stabilization; discretionary fiscal policy; government; social and health spending; Maastricht Treaty; real time reaction functions; stability and growth pact
JEL Codes: E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output (C67) | net primary surplus (H62) |
| economic contraction (F44) | automatic stabilization from social spending (H53) |
| discretionary fiscal policy during expansions (E62) | neutralization of automatic stabilization (E63) |
| government debt (H63) | primary surplus (H62) |
| election years (K16) | tax revenues (H29) |
| Maastricht Treaty or Stability and Growth Pact (E60) | fiscal behavior in Eurozone (E62) |