Fiscal policy in the 21st century: Evidence on automatic stabilizers in the European union

Abstract

Using data from 29 European countries over 2002Q1–2019Q4, we estimate automatic stabilizers using various techniques, and show that the use of simple measures of government size as proxies is based on assumptions that are unrealistic and potentially misleading. Relaxing these assumptions allows us to construct measures of automatic stabilizers which are based on revenue and expenditure elasticities that are estimated directly using the regression-based approach and allowed to vary across countries. We demonstrate that higher automatic stabilizers are associated with lower output volatility, and the relationship is statistically significant and remarkably robust. At the same time, however, the “stabilization benefit” of automatic stabilizers is shown to have varied considerably across countries and over time.