Liability-Creating Versus Non-Liability-Creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization, and EMU
IMF Working Papers, August 1, 1998
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- Liability-Creating Versus Non-Liability-Creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization, and EMU
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Bibliographic details
- Authors: Paul R Masson, Tamim Bayoumi
- Published: August 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853575.001
Summary — main findings
- The paper examines theoretical and empirical issues associated with the operation of fiscal stabilizers within an economy.
- Fiscal stabilizers operate most effectively at a national, rather than local, level.
- Differing cycles across regions tend to offset each other for the country as a whole, so national fiscal stabilizers are not associated with the same increase in future tax liabilities for the region as local ones.
- Accordingly, the negative impact from the Ricardian effects associated with these tax liabilities is smaller for national stabilizers.
- Empirical analysis using data across Canadian provinces indicates that local stabilizers are only 1/3 to ½ as effective as national stabilizers that create no future tax liability.
Subjects and keywords
- Subjects: Consumption, Fiscal policy, Fiscal stabilization, Government consumption, Income, National accounts, Personal income
- Keywords: beginning-of-period government debt, Consumption, deficit variable, Europe, Fiscal Stabilization, Government consumption, Income, Keynesian deficit finance, Levels of Government, liability-creating deficit, Personal income, Ricardian Equivalence, tax liability, WP
Policy implications and interpretation
- National-level fiscal stabilizers can provide more effective stabilization because regional cycle offsets reduce the implied increase in future regional tax liabilities.
- Policies that create no future tax liability at the national level produce smaller Ricardian negative effects compared with local liability-creating policies.
- For federations or monetary unions (e.g., EMU contexts), reliance on national or central fiscal stabilization mechanisms may yield stronger stabilizing outcomes than decentralized, liability-creating local fiscal responses.
Source: IMF Working Paper — "Liability-Creating Versus Non-Liability-Creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization, and EMU", Paul R Masson and Tamim Bayoumi, August 1, 1998.