Fiscal policy in Europe: how effective are automatic stabilisers?

It is largely recognised that fiscal policy will have larger responsibilities for cyclical stabilisation in Economic Monetary Union (EMU) given the loss of the monetary instrument. At the same time, the EMU's budgetary framework emphasises the need for reliance on automatic fiscal stabilisers, rather than active policies in cushioning the business cycle. The paper demonstrates that automatic stabilisers are relatively powerful in the event of shocks to private consumption, but less so in the case of shocks to private investment and exports. In the case of supply side shocks, the automatic stabilisers are largely ineffective, but this may actually be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation..

• Primary Source

http://ec.europa.eu/comm/economy_finance/publications/economic_papers/2002/ecp177en.pdf http://ec.europa.eu/comm/economy_finance/publications/economic_papers/2002/ecp177en.pdf

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