Working Paper: NBER ID: w16275
Authors: Mathias Dolls; Clemens Fuest; Andreas Peichl
Abstract: This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 percent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view.
Keywords: automatic stabilizers; economic crisis; US; Europe; tax and transfer systems; demand stabilization
JEL Codes: E32; H21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| automatic stabilizers (E63) | shock absorption (proportional income shock) (E25) |
| automatic stabilizers (E63) | shock absorption (unemployment shock) (J65) |
| shock absorption (proportional income shock) (E25) | demand stabilization (E63) |
| shock absorption (unemployment shock) (J65) | demand stabilization (E63) |
| automatic stabilizers (E63) | size of fiscal stimulus (E62) |