The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers

By Maria Antoinette Silgoner, Jesús Crespo-Cuaresma, Gerhard Reitschuler

September 1, 2003

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Maria Antoinette Silgoner, Jesús Crespo-Cuaresma, and Gerhard Reitschuler. The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers, (USA: International Monetary Fund, 2003) accessed November 21, 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

We study the smoothing impact of fiscal stabilizers (proxied by government expenditures or revenues) on business cycle volatility for a panel of EU countries in the period 1970-99. The results show that the business cycle volatility smoothing effect of fiscal stabilizers may revert at high levels. We present evidence that for government expenditure ratios exceeding an estimated value of about 38 percent, a further expansion in the size of the government could actually lead to an increase in cyclical volatility. This may call for a reconsideration of the use of fiscal stabilizers for business cycle smoothing.

Subject: Automatic stabilizers, Business cycles, Economic growth, Expenditure, Fiscal policy, Production, Production growth

Keywords: Adjusted government expenditure, Automatic stabilizers, Business Cycle Volatility, Business cycles, Cyclical volatility, Europe, Expenditure side, Fiscal Stabilizers, Government, Government expenditure side, Government size, Government strength indicator, Government strength variable, Nonlinearity, Nonwage government consumption, Power indices, Production growth, Strength indicator, Unadjusted government expenditure series, Wage government consumption, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/182
Stock No:

WPIEA1822003
ISBN:

9781451859287
ISSN:

1018-5941

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