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Fiscal Policy as a Stabilization Tool

  • Antonio Fatás EMAIL logo and Ilian Mihov
Published/Copyright: October 25, 2012
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 12 Issue 3

Abstract

We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture the fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades.

KEYWORDS: : Fiscal Policy; Stabilization; Business Cycles; Government Size
This paper was written for the 56th Economic Conference of the Federal Reserve Bank of Boston on “Long-term effects of the Great Recession” to be held October 18-19, 2011. We would like to thank our discussants, Gauti Eggertsson and Silvia Ardagna, as well as conference participants for their comments and suggestions.
Published Online: 2012-10-25

© 2012 by Walter de Gruyter GmbH & Co.

Articles in the same Issue

  1. Introduction
  2. A Conference Overview
  3. Session 1
  4. The Statistical Behavior of GDP after Financial Crises and Severe Recessions
  5. First Discussant Comment on “The Statistical Behavior of GDP after Financial Crises and Severe Recessions”
  6. Second Discussant Comment on “The Statistical Behavior of GDP after Financial Crises and Severe Recessions”
  7. Session 2
  8. Shifting Confidence in Homeownership: The Great Recession
  9. First Discussant Comment on “Shifting Confidence in Homeownership: The Great Recession”
  10. Second Discussant Comment on “Shifting Confidence in Homeownership: The Great Recession”
  11. Session 3
  12. Potential Effects of the Great Recession on the U.S. Labor Market
  13. First Discussant Comment on “Potential Effects of the Great Recession on the U.S. Labor Market”
  14. Second Discussant Comment on “Potential Effects of the Great Recession on the U.S. Labor Market”
  15. Session 4
  16. The Future of U.S. Housing Finance Reform
  17. First Discussant Comment on “The Future of U.S. Housing Finance Reform”
  18. Second Discussant Comment on “The Future of U.S. Housing Finance Reform”
  19. Session 5
  20. Fiscal Policy as a Stabilization Tool
  21. First Discussant Comment on “Fiscal Policy as a Stabilization Tool”
  22. Second Discussant Comment on “Fiscal Policy as a Stabilization Tool”
  23. Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis? A Panel Discussion
  24. First Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  25. Second Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  26. Third Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  27. Speeches
  28. Global Financial Intermediaries: Lessons and Continuing Challenges
  29. The Effects of the Great Recession on Central Bank Doctrine and Practice
https://doi.org/10.1515/1935-1690.113
Keywords for this article
Fiscal Policy; Stabilization; Business Cycles; Government Size

Articles in the same Issue

  1. Introduction
  2. A Conference Overview
  3. Session 1
  4. The Statistical Behavior of GDP after Financial Crises and Severe Recessions
  5. First Discussant Comment on “The Statistical Behavior of GDP after Financial Crises and Severe Recessions”
  6. Second Discussant Comment on “The Statistical Behavior of GDP after Financial Crises and Severe Recessions”
  7. Session 2
  8. Shifting Confidence in Homeownership: The Great Recession
  9. First Discussant Comment on “Shifting Confidence in Homeownership: The Great Recession”
  10. Second Discussant Comment on “Shifting Confidence in Homeownership: The Great Recession”
  11. Session 3
  12. Potential Effects of the Great Recession on the U.S. Labor Market
  13. First Discussant Comment on “Potential Effects of the Great Recession on the U.S. Labor Market”
  14. Second Discussant Comment on “Potential Effects of the Great Recession on the U.S. Labor Market”
  15. Session 4
  16. The Future of U.S. Housing Finance Reform
  17. First Discussant Comment on “The Future of U.S. Housing Finance Reform”
  18. Second Discussant Comment on “The Future of U.S. Housing Finance Reform”
  19. Session 5
  20. Fiscal Policy as a Stabilization Tool
  21. First Discussant Comment on “Fiscal Policy as a Stabilization Tool”
  22. Second Discussant Comment on “Fiscal Policy as a Stabilization Tool”
  23. Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis? A Panel Discussion
  24. First Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  25. Second Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  26. Third Panelist Remarks: “Will the Federal Reserve Be Able to Serve as the Lender of Last Resort in the Next Financial Crisis?”
  27. Speeches
  28. Global Financial Intermediaries: Lessons and Continuing Challenges
  29. The Effects of the Great Recession on Central Bank Doctrine and Practice
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