Automatic Stabilizers Research Articles

Fiscal Policy’s Function in Reducing Economic Downturn

Fiscal policy drives a nation’s economic activity by taxing and spending by the government. It is essential for preventing economic downturns. Generally, it operates as follows: A rise in government spending Business and consumer spending typically decreases during recessions, which lowers the economy’s total demand. The government can spend more on infrastructure, services, and public initiatives to make up for this. Quick economic stimulation results in more demand for goods and services as well as the creation of jobs. Tax Rebates: Lower taxes generate more cash for businesses and consumers alike. More money is available for both individuals and companies to invest in and expand their businesses. It is possible to counteract the drop in private sector demand by increasing spending and investment. Transfer Payments: The government may also raise transfer payments to pay for social security, unemployment insurance, and other welfare programs. These payments shield the purchasing power of those who are adversely affected by the recession and aid in stabilizing the economy. Automatic Stabilizers: Without the need for new legislation, some components of fiscal policy automatically promote economic stabilization. For instance, lower-class and impoverished households benefit from automatic stabilizers that reduce taxes in reaction to slower economic development and falling revenues. Unemployment insurance and progressive income taxes are two instances of these stabilizers. As a result, aggregate demand is sustained. Debt and Budget Deficits: During a recession, the government may have a budget deficit if expenditure exceeds revenue. This may lead to an increase in the national debt, but this is typically justified as a benefit to the economy. The theory is that the economy will eventually recover from the short-term debt increase due to the stimulus’s long-term impacts, improving the country’s financial situation. The Multiplier Effect: The economy may be impacted in a number of ways by the government’s increased expenditure and tax incentives. For example, when the government funds a new infrastructure project, the workers employed to complete it spend their earnings on goods and services, increasing demand and economic activity as well as the profits of themselves and other firms. Generally speaking, the goal of fiscal policy is to boost the economy during recessions in order to lessen their severity and hasten their recovery.

Assessing the effectiveness of social protection measures in mitigating COVID-19-related income shocks in the European union

By means of counterfactual simulation methods, this paper quantifies the role of tax–benefit policies in mitigating the shock of the COVID-19 pandemic to household income in the European Union. The tax-benefit microsimulation model for the European Union EUROMOD is used to decompose changes in the income distribution into the effects of: (i) earnings losses due to COVID-19, (ii) automatic stabilizers, (iii) monetary compensation schemes introduced during the pandemic; and (iv) COVID-19-specific reforms to taxes and benefits implemented by European Union governments. The results show a great deal of heterogeneity between countries in terms of earnings losses and the effect of tax-benefit policies during the COVID-19 pandemic. In most countries, the largest contribution to cushioning the economic shock of the pandemic comes from monetary compensation schemes. Automatic stabilizers also play a role, mainly through the effects of social insurance contributions, taxes, and unemployment insurance benefits. Tax-benefit systems cushioned incomes to a large extent even among those most severely affected by the shock to earnings, with an important role for monetary compensation schemes, but also a larger stabilizing effect of unemployment insurance. Among automatic stabilizers, social assistance benefits played an important role in cushioning the income shock for the poorest quintiles among the most severely affected, but only in selected countries.

Assessing the role of tax‐benefit policies during the COVID‐19 pandemic: Evidence from the Andean region

AbstractThis paper aims to assess the role of tax‐benefit policies in mitigating the effects of COVID‐19 on the distribution of household disposable income in Colombia, Ecuador, and Peru. We exploit data from phone surveys collected during the pandemic combined with tax‐benefit microsimulation techniques to nowcast the distribution of household disposable income. Our results show a sharp drop in household disposable income and a dramatic increase in poverty and inequality during the second quarter of 2020. By the end of 2020, the economy recovers but poverty and inequality remain above the pre‐pandemic levels. COVID‐related policies cushion the effect of the crisis at the bottom of the distribution, and their effect on poverty and inequality largely depends on the generosity of the benefits implemented. By contrast, automatic stabilizers mitigate the impact of the income shock at the top of the distribution due to the effect of social insurance contributions and personal income tax, whereas social assistance programs in place before the pandemic fail to act as automatic stabilizers due to their design as proxy means‐tested benefits. We validate our nowcasting estimates with actual survey data from the end of 2020 and show that our results match closely poverty and inequality indicators in all three countries.

Sustaining Prosperity: Exploring Fiscal and Financial Sustainability in the Context of Dynamic Fiscal Policy

Purpose: This study explores how fiscal policy and financial sustainability support sustainable economic prosperity amid global instability. It examines the impact of government taxation and spending decisions on economic outcomes, aggregate demand, employment, inflation, social welfare, infrastructure development, and income inequality. Financial sustainability is analyzed through prudent fiscal management and debt sustainability, focusing on long-term government finance viability and mitigating fiscal risks. Research Design and Methodology: The study employs a qualitative methodology, incorporating a comprehensive literature review of theoretical works, empirical studies, and policy analyses. Data is collected through systematic reviews of scholarly articles, books, policy reports, and official publications. Thematic analysis techniques, including coding and categorization, synthesize findings, with reflexivity to consider assumptions and biases. Findings and Discussion: The research underscores the importance of flexibility and adaptability in fiscal policy, highlighting automatic stabilizers and countercyclical policies for economic stabilization and sustainable growth. Prudent debt management, including debt restructuring and fiscal consolidation, is vital for mitigating fiscal risks and ensuring debt sustainability. The findings emphasize integrating fiscal sustainability with broader economic and social goals and the need for institutional reforms and international cooperation to enhance fiscal governance. Implications: The study provides insights for policymakers on the importance of fiscal prudence and sustainability. It advocates for a balanced approach that addresses short-term stabilization and long-term goals and calls for institutional reforms to improve fiscal discipline, transparency, and accountability. By integrating interdisciplinary perspectives, policymakers can develop resilient and sustainable fiscal policies that promote long-term prosperity and social equity.

Tax Instalment Plans: A Legal Instrument of Financial Sustainability in a Crisis

Abstract The Covid-19 pandemic as well as the war in Ukraine represent the biggest hit to the Czech economy since the Great Recession. In the Czech Republic, several tax measures are being used to help economic entities overcome the current crisis and keep their businesses running. One of them is the tax instalment plan. This article aims to identify why the tax instalment plan could be an appropriate fiscal measure in times of economic crisis. The author presents a classical legal instrument in the tax area – the tax instalment plan – and analyses it from an innovative point of view rather than the usual perspective, that is, from the macroeconomic point of view. The article analyses the legal conditions for the use of this instrument in the Czech Republic, points out the difficulties of interpretation in practice and evaluates it in the context of the theoretical background of desirable fiscal crisis measures. The conclusions of the research confirm the hypothesis that this legal instrument is an effective and used tool for facilitating the sustainability of private and public finances in times of crisis. It combines the desirable aspects of both automatic stabilisers and discretionary measures.

The economic impact of general vs. targeted lockdowns: New insights from Italian municipalities

In response to COVID-19, most governments implemented either general or geographically targeted lockdowns. While the contractionary effects of general lockdowns have been well-documented, this paper is the first to contrast the economic impacts of the two approaches in a quasi-experimental setting. To this aim, we construct a high-frequency database combining unique information from mobile devices and administrative data across Italian municipalities. Using difference-in-differences approaches, our results confirm that general lockdowns considerably reduced mobility and employment, but we also find that localised measures only led to modest declines in mobility with minimal additional impact on employment. Focusing on the distributional consequences, we show that economic activity decreased less in wealthier communities with a higher capacity for telework. Moreover, short-time work schemes, serving as automatic stabilizers, predominantly benefited affluent areas. We conclude that an optimal policy mix involves targeted lockdown measures, complemented by adequate social policies and infrastructure investment.

БЮДЖЕТ РОССИИ И НЕСТАБИЛЬНОСТЬ ЭКОНОМИКИ XXI ВЕКА

The beginning of the twenty-first century was marked by various economic crises that affected the economy and changed the state budget structure. The fiscal policy is designed to stabilize the economy by using such tools as automatic and discretionary stabilizers. The work employed statistical analysis methods, specifically region clustering using the k-mean approach, calculating statistical indicators, and assessing budgets with the share calculated by expenditure items and the supplied value by 2005 per capita. Conclusions are made about changes in the structure of expenditures during crises and their response to budgetary policy instruments. At the same time, the cause of the crisis is reflected in the structure of expenditures; for instance, an increase in expenditures on the national economy was noted in 2009, while an increase in healthcare costs happened in 2020. In addition, the classification of regions into clusters did not reveal the specifics of the budget structure, but budget features are observed among regions when they are classified into two categories: high gratuitous receipts (greater than 20 % of income) and moderate (up to 20 % of income). Thus, in regions with a high share of gratuitous receipts, there is an increase in spending on social policy per capita at comparable prices, whereas there is an increase in spending on healthcare regarding the moderate share. The practical significance of the study lies in the possibility of using the results when writing analytical reports for public authorities and developing measures for various stages of the economic cycle.

Using demand response to improve power system small-signal stability

With the increase of uncertain and intermittent renewable energy supply on the grid, the power system has become more vulnerable to instability. In this paper, we develop a demand response strategy to improve power system small-signal stability. We pose the problem as an optimization problem wherein the total demand-responsive load is held constant at each time instance but shifted between different buses to improve small-signal stability, which is measured by small-signal stability metrics that are functions of subsets of the system’s eigenvalues, such as the smallest damping ratio. To solve the problem, we use iterative linear programming and generalized eigenvalue sensitivities. We demonstrate the approach via a case study that uses the IEEE 14-bus system. Our results show that shifting the load between buses, can improve a small-signal stability margin. We explore the use of models of different fidelity and find that it is important to include models of the automatic voltage regulators and power system stabilizers. In addition, we show that load shifting can achieve similar improvements to generation shifting and better improvement than simply tuning power system stabilizers.

How Have the Nordic Welfare States Responded to the Unexpected Increase in Inflation?

Rising inflation in the Nordic societies has changed the living standards for many families. The situation differs not only between the four Nordic countries analysed, but even within each of the Nordic countries. The needs for intervention have varied. Several elements have been used to determine who is facing the most risks. This article shows how to combine automatic stabilisers with temporary policy interventions to deal with increased inflation in general or specific sub-elements (such as oil, natural gas). Focus is on the degree of and criteria for targeting. Possible distributional consequences of the adopted measures will be discussed. Lastly, the article considers whether the observed responses to the crisis have implications for the understanding of the Nordic welfare state model. The article investigates institutional, political and economic reasons for the variations in the interventions. The article concludes that in managing the crisis, the Nordic countries have adopted stronger targeting towards those considered to be in need, displaying some innovations in their social policy approach. Yet, one can trace a high degree of path-dependency, with the countries adhering to universalist principles, with an aim of redistributing resources.

Ex-post and real-time estimations of the output gap: A new assessment of fiscal procyclicality in the eurozone

The revisions implemented twice a year by the European Commission significantly change not only the forecasts but also the past values of the output gap. Consequently, many possible time series exist. Based on a new approach for estimating a real-time definition of the business cycle, we develop a comparative framework between ex-post and real-time variables using dynamic panel data models with FE, GLS and AB estimators. The real-time version of the output gap solves the important endogeneity issue between the budget balance and the output gap. Considering the period from 1995 to 2021 and the 19 Eurozone countries, our analysis deepens the cyclical nature of fiscal policy, pointing to robust procyclicality. Regardless of the specification, fiscal policy was found to be procyclical, but real-time and ex-post estimates have shown some interesting discrepancies (i.e., on a real-time basis, discretionary budgetary decisions have never been significantly expansionary, and the likely positive effects of automatic stabilisers during economic downturns have been weakened by spending reductions and/or revenue increases). Our findings may help the future reform of the Stability and Growth Pact.

Evaluation and comparison of energy tax, resource tax and air pollution tax: an environmental-DSGE model

How governments choose green fiscal policies to achieve green transition is an urgent issue to be solved. In this context, an environmental-dynamic stochastic general equilibrium model is developed to analyze and compare the macroeconomic effects of fossil energy tax, natural resource tax and air pollution tax. The research shows that the supply-side policy, the natural resource tax, has a stronger impact on the economy than the other two demand-side policies, the fossil energy tax and air pollution tax. More importantly, supply-side policies are more effective than demand-side policies in two aspects: (1) all three policies can make up for the negative impact of tight fiscal policies on the economy, with supply-side policy offsetting the negative impact to a greater extent than demand-side policy; (2) all three policies can act as automatic stabilisers of the economy, with supply-side policy being more effective than demand-side policy in smoothing economic fluctuations.

Asymmetries in post-war monetary arrangements in Europe: From Bretton Woods to the Euro Area

This paper provides a perspective on monetary cooperation in Europe, before and after the creation of the euro area (EA), focusing on macroeconomic and financial asymmetries among its member states. After surveying the evolution of EU macroeconomic and monetary arrangements and developments before and after the creation of the euro, and particularly the euro area crisis, we argue that economic and financial asymmetries have played a key role in post-war monetary arrangements in Europe. Such asymmetries have also characterized the euro area, which needs fundamental fiscal, financial and labor market reforms in order to operate more efficiently as an optimum currency area. Two key reforms would be a common EA budget of sufficient size, which would help smooth out the asymmetric impact of macroeconomic shocks through the operation of automatic fiscal stabilizers and the explicit recognition of the ECB as a lender of last resort in times of crisis.

Eingebaute Solidarität: „Starke Schultern“ finanzieren Entlastungen in Krisenzeiten

Abstract In times of exceptionally severe crises, it may be necessary for the state, in the spirit of solidarity, to cushion the financial burdens borne by lower-income households. To do so, it might be necessary to use discretionary policies in addition to automatic stabilizers. High inflation caused by the Russian war of aggression on Ukraine is one such crisis. Since the state has no financial resources of its own, it can only do so - apart from stretching the burden over time - through increased redistribution from upper to lower incomes. What are the effects of this additional government redistribution along the income distribution when considering not only the expenditures for the discretionary relief packages, but also the revenues used for this purpose - which can only be quantified via economic modeling?

Fiscal stabilization rule

The optimal fiscal stabilization rule presented in this paper is derived from a loss function where the government is assumed to keep the structural balance close to its target level and simultaneously stabilize the GDP and inflation gaps. The rule yields the size of the discretionary stabilization measures needed, in addition to automatic stabilizers, to be able to stabilize the business cycle, without compromising the sustainability of public finances. Using this policy rule and a first-order Taylor expansion of the fiscal balance, we decompose the automatic stabilizers and the discretionary fiscal policy conditional on business cycle conditions.

Effects of China's low-carbon policy under stochastic shocks-a multi-agent DSGE model analysis.

China has announced a target of achieving carbon peaking by 2030 and carbon neutrality by 2060. Therefore, it is important to assess the economic impacts and emission reduction effects of China's low-carbon policies. In this paper, a multi-agent dynamic stochastic general equilibrium (DSGE) model is established. We analyze the effects of carbon tax and carbon cap-and-trade policies under both deterministic and stochastic conditions, as well as their ability to cope with stochastic shocks. We found that (1) from a deterministic perspective, these two policies have the same effect. Every 1% cut in CO2 emissions will bring a 0.12% output loss, a 0.5% drop in demand for fossil fuels, and a 0.05% rise in demand for renewable energy; (2) from a stochastic perspective, effects of these two policies are different. This is mainly because economic uncertainty does not change the cost of CO2 emissions under a carbon tax policy, but it does change the price of CO2 quotas and the emission reduction behaviors under a carbon cap-and-trade policy; (3) from an economic volatility perspective, both two policies can act as automatic stabilizers. Compared to a carbon tax, a cap-and-trade policy can better ease economic fluctuations. The results of this study provide implications for policy-making.

The role of inflation in the UK economy in the post-pandemic era

The paper focuses on the specific nature of the inflation process and a set of anti-inflation policies in the United Kingdom in 2021-2022. Based on the analysis of the economic literature, speeches given by the central bank’s staff, official documents and statistical data the author discusses the implicit transition in the regulation approaches used by HM Treasury and the Bank of England. There is some evidence that the cost-of-living crisis as a part of the inflation problem gets a top priority in the post-pandemic era. The government addresses this issue mainly through the income redistribution and benefits and financial support for lower income households. With regard to the inflation problem per se, the official approach implies the shift from monetary to fiscal tools. It means the expanding use of automatic stabilizers through increasing taxes and NICs in accordance with the IMF recommendations. Meanwhile, the Bank of England’s measures are more consistent with the task of financing the government’s borrowing than maintaining the price stability. These findings highlight the rising role of the state in the UK economy. The paper concludes with some comments regarding the split within the conservative party over the marked shifts in the monetary and fiscal policy.

This time truly is different: The cyclical behaviour of fiscal policy during the Covid-19 crisis

Fiscal policy was more countercyclical during the Covid-19 crisis than in previous (crisis) episodes. This paper presents empirical evidence in favour of a “this time truly is different” moment based on analysing the cyclical behaviour of fiscal policy for 28 advanced economies over 1995–2021. Discretionary fiscal policy during the Covid-19 crisis (2020–2021) did more to counteract the downturn – especially in the Eurozone –, as we do not find comparable evidence for countercyclicality during the financial crisis or Euro crisis. Automatic fiscal stabilisers, the non-discretionary domain of fiscal policy, significantly contributed to countercyclical stabilisation during the pandemic.

Statistical Method of Low Frequency Oscillations Analysis in Power Systems Based on Phasor Measurements

This study aims to develop and test a new accelerated method for analyzing low-frequency oscillations in power systems using phasor measurements. The proposed method is based on the use of mathematical statistics methods that do not require significant computing power and have high reliability. Changes in the structure of power generation and integration of control devices based on power electronics cause low-frequency oscillations of power system operation parameters that present a threat. These changes result in a reduction in the total inertia of power systems with the subsequent impact on the operation of automatic voltage regulators and power system stabilizers, the purpose of which is to damp low-frequency oscillations. We conduct a careful review of the existing methods for low-frequency oscillations analysis in power systems to identify the gaps in the literature and design a new method to address the issues. The proposed method is tested on real-life data that was obtained during a disturbance with a transient event. Estimation of the low-frequency oscillation parameters was carried out, and the potential threat posed by these phenomena was examined. The implementation of the proposed algorithm for analyzing low-frequency oscillations is done using the Matlab programming language. Evaluation of the proposed algorithm is performed on physical data obtained during real transient processes occurring at large power plants.

Unconventional Monetary Policy or Automatic Stabilizers?:A Financial Post-Keynesian Comparison

Unconventional Monetary Policy or Automatic Stabilizers?:A Financial Post-Keynesian Comparison

The Impact of Automatic Stabilizers on the Economic Growth of Albania During the Period 1999-2021

Fiscal policy remains a crucial and powerful strategy to improve the welfare of citizens. During the last three decades, Albania has faced enormous social-economic challenges, raising the necessity for an adequate fiscal policy under the current economic situation. The correlation between fiscal policy and economic growth is a highly debated topic in literature reviews, as some of the fiscal tools do not influence in the same direction on economic growth. The purpose of the article is to see the influence of Automatic Stabilizers (AS) on the Economic Growth of Albania during the period 1999-2022. Most of the topics have been focused on the influence of active fiscal policy on economic growth despite this an unclear gap exists about the influence of the automatic fiscal policy, especially in Albania reality. The secondary data of the Ministry of Finance and INSTAT institutions about the variables and the factors that influence them like the tax system, tax revenues, and public expenditures are analyzed for this purpose. The conclusions reveal the necessity to improve especially the formula of the tax system according to the challenges of the economy. For almost three decades, the data of Automatic Stabilizers (AS) have been included in the multiple linear regression equation using the Ordinary Least Square (OLS) technique. The empirical result shows a narrow positive impact range of Automatic Stabilizers on Economic Growth. The change in the tax system and events such as the earthquake on November 9th, 2019, and the Covid-19 pandemic seem to have had a huge impact on this relationship. As Automatic Stabilizers have to do with vulnerable groups (social assistance is part of AS), some actions should be undertaken focusing on the improvement of the tax system, according to optimal management of expenditures. Applying the best practices to increase the revenues of vulnerable groups is necessary to cope better with the increasing actual rate of inflation.