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Nordic Economic Policy Review Number 1 / 2010

Fiscal Consequences of the Crisis

image of Nordic Economic Policy Review Number 1 / 2010

The Nordic Economic Policy Review is published by the Nordic Council of Ministers and addresses policy issues in a way that is useful for informed non-specialists as well as for professional economists. All articles are commissioned from leading professional economists and are subject to peer review prior to publication. The Nordic Economic Policy Review is published twice a year. The journal is distributed free of charge to members of the Nordic economic associations. The easiest way of subscribing to the NEPR is therefore to become a member of one of these associations, i.e., Denmark: Nationaløkonomisk Forening Finland: Taloustieteellinen Yhdistys Norway: Samfunnsøkonomene Sweden: Nationalekonomiska Föreningen For institutional subscriptions, please contact [email protected] Content: Introduction: Fiscal consequences of the crisis - Torben M. Andersen and Steinar Holden. Some lessons for fiscal policy from the financial crisis - Philip R. Lane. Fiscal policy and macroeconomic stability: New evidence and policy implications - Xavier Debrun and Radhicka Kapoor. Fiscal sustainability in the wake of the financial crisis - Torben M. Andersen. Fiscal policy and labor markets at times of public debt - Giuseppe Bertola. Fiscal costs of financial sector support: Measures and implications for fiscal policy - Daehaeng Kim and Manmohan S. Kumar. Monetary implications of the crisis: Dominance at stake - Charles Wyplosz. The Swedish fiscal policy framework - Robert Boije, Albin Kainelainen and Jonas Norlin.

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Fiscal policy and macroeconomic stability: New evidence and policy implications

In this paper we revisit the empirical link between fiscal policy and macroeconomic stability. Our basic presumption is that by definition, the operation of automatic stabilizers should always and everywhere contribute to greater macroeconomic stability (output and consumption). However, two stylized facts seem at odds with that prediction. First, the moderating effect of automatic stabilizers appears to have weakened in advanced economies between the mid-1990s and 2006 (the end of our main sample). Second, automatic stabilizers do not seem to be effective in developing economies. Our analysis addresses these apparent puzzles. Two salient features of our approach are (1) a systematic test for the government's ambivalent role as a shock absorber and a shock inducer – thereby removing a downward bias present in existing estimates of the impact of automatic stabilizers – and (2) accounting for determinants of macroeconomic volatility over time. The results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers. Moreover, the destabilizing impact of policy changes not systematically related to the business cycle may not be as robust as suggested in the literature. We also provide tentative evidence that automatic stabilizers were the main channel of fiscal stabilization during the great recession of 2009.

English

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