Fiscal policy over the cycle: the role of automatic stabilizers

Abstract

This article suggests a new adjusted fiscal balance to be used in studies of the cyclicality of fiscal policy. The suggested approach takes into account both discretionary policy action and those automatic stabilizers that are a systematic component of the tax and benefit system, but excludes additional revenues that are due to applying an unchanged average tax rate to nominal GDP in excess of potential. This article argues that this has advantages over the previous approaches relying either on the overall or the cyclically adjusted (or structural) primary balance.

Keywords:

• fiscal policy
• business cycle
• structural balance

JEL Classification:

• E62
• H30
• H62

Acknowledgements

The author is grateful for the helpful comments by Ana Corbacho, Kerstin Gerling, Bertrand Gruss, Daniel Leigh, Nicolas Magud, Andre Meier, Joana Pereira, Miguel Savastano, Sebastian Sosa, and Alejandro Werner.

This article should not be reported as representing the views of the IMF.

Notes

¹ Even discretionary measures may not be picked up by differences in the CAPB, if such action is taken systematically and therefore included in estimated elasticities.