Automatic Stabilizers in a Low-Rate Environment

Abstract

In a world where monetary policy cannot assume responsibility for stabilization policy, there is a strong need for fiscal policy to address stabilization issues. In this context, we argue for “semi-automatic stabilizers,” aimed at reducing unemployment slumps rather than output recessions. We show that the hole left by the limits on monetary policy implies a large role for fiscal policy in general and for semi-automatic stabilizers in particular. Finally, we argue that the design of stabilizers, whether they focus on mechanisms that rely primarily on income or on intertemporal substitution effects, depends crucially on the general design of discretionary policy.