Accessible Requires Authentication Published by De Gruyter October 25, 2012

Fiscal Policy as a Stabilization Tool

Antonio Fatás and Ilian Mihov

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.


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.