The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers
September 1, 2003
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Summary
We study the smoothing impact of fiscal stabilizers (proxied by government expenditures or revenues) on business cycle volatility for a panel of EU countries in the period 1970-99. The results show that the business cycle volatility smoothing effect of fiscal stabilizers may revert at high levels. We present evidence that for government expenditure ratios exceeding an estimated value of about 38 percent, a further expansion in the size of the government could actually lead to an increase in cyclical volatility. This may call for a reconsideration of the use of fiscal stabilizers for business cycle smoothing.
Subject: Automatic stabilizers, Business cycles, Economic growth, Expenditure, Fiscal policy, Production, Production growth
Keywords: adjusted government expenditure, Automatic stabilizers, Business Cycle Volatility, Business cycles, cyclical volatility, Europe, expenditure side, Fiscal Stabilizers, government, government expenditure side, government size, government strength indicator, government strength variable, Nonlinearity, nonwage government consumption, power indices, Production growth, strength indicator, unadjusted government expenditure series, wage government consumption, WP
Pages:
30
Volume:
2003
DOI:
Issue:
182
Series:
Working Paper No. 2003/182
Stock No:
WPIEA1822003
ISBN:
9781451859287
ISSN:
1018-5941
