Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding

July 1, 2010

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Carlo Cottarelli, and Annalisa Fedelino. Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding, (USA: International Monetary Fund, 2010) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The size of government is a commonly used variable in many analytical studies on the effects of fiscal policy. An accepted practice is to measure it as the ratio of government spending to GDP. However, this is not the correct metric when computing the stabilization effects of nondiscretionary fiscal policy. Intuitively, public spending does not react to cyclical conditions as much as taxes do - as reflected in the standard zero-one elasticity assumptions for spending and revenue, respectively. This paper shows that the revenue to GDP ratio is the appropriate indicator of government size for the purpose of assessing the stabilization effects of nondiscretionary fiscal policy.

Subject: Automatic stabilizers, Disposable income, Expenditure, Fiscal policy, Output gap

Keywords: Revenue ratio, Spending ratio, WP

Publication Details

Pages:

14
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/155
Stock No:

WPIEA2010155
ISBN:

9781455201389
ISSN:

1018-5941

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