Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding
IMF Working Papers, July 1, 2010
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- Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding
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Bibliographic details
- Authors: Carlo Cottarelli, Annalisa Fedelino
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201389.001
Summary
- Authors: Carlo Cottarelli, Annalisa Fedelino
- Date: July 1, 2010
- Series: Working Paper No. 2010/155
- Issue: 155
- Volume: 2010
- Pages: 14
- DOI: https://doi.org/10.5089/9781455201389.001
- ISBN: 9781455201389
- ISSN: 1018-5941
- Subject: Automatic stabilizers, Disposable income, Expenditure, Fiscal policy, Output gap
- Keywords: revenue ratio, spending ratio, WP
Core argument
- The size of government is commonly measured as the ratio of government spending to GDP.
- For assessing the stabilization effects of nondiscretionary fiscal policy, the revenue to GDP ratio is the appropriate indicator of government size.
- Intuition: public spending does not react to cyclical conditions as much as taxes do, consistent with the standard zero-one elasticity assumptions for spending and revenue, respectively.
Key findings
- The commonly used spending-to-GDP metric mismeasures the relevant government size when computing automatic-stabilizer effects.
- The revenue-to-GDP ratio better captures the responsiveness of fiscal variables to the cycle and thus the strength of automatic stabilizers.
- The paper explicitly contrasts the behavioral responses of taxes (revenue) and spending under standard zero-one elasticity assumptions.
Implications for analysis and policy
- Empirical and analytical studies assessing stabilization effects of nondiscretionary fiscal policy should use the revenue-to-GDP ratio rather than the spending-to-GDP ratio as the measure of government size.
- Using the correct metric affects the assessment of how strongly fiscal policy automatically stabilizes output over the business cycle.
Publication notes
- Format: IMF Working Papers
- Access: Visit the IMF eLibrary for the full paper and additional formats.
This content unit is from "Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding", IMF Working Papers 2010/155 (July 1, 2010) by Carlo Cottarelli and Annalisa Fedelino.