Fiscal Policy and Macroeconomic Stability: Automatic Stabilizers Work, Always and Everywhere
IMF Working Papers, May 1, 2010
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Bibliographic details
- Authors: Xavier Debrun, Radhicka Kapoor
- Published: May 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455200702.001
Summary and central findings
- The paper revisits the link between fiscal policy and macroeconomic stability.
- Two salient features of the analysis:
- (1) A systematic test for the government’s ambivalent role as a shock absorber and a shock inducer—removing a downward bias present in existing estimates of the impact of automatic stabilizers.
- (2) A broad sample of advanced and emerging market economies.
- Main results:
- Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers.
- The destabilizing impact of policy changes not systematically related to the business cycle may not be as robust as suggested in the literature.
Methodology highlights
- The study implements a systematic test that addresses a downward bias in existing estimates of automatic stabilizers’ impact.
- The empirical sample spans both advanced and emerging market economies (broad sample).
Policy implications and interpretation
- Automatic stabilizers are the primary channel through which fiscal policy contributes to macroeconomic stabilization.
- Discretionary policy changes that are not systematically related to the business cycle may have less robust destabilizing effects than previously suggested in the literature.