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Comments on Antonio Fat ás Luis Servén The World Bank Workshop on fiscal policy IMF, June 2009. Automatic stabilizers. Three components of fiscal policy: Automatic Systematic discretionary Purely discretionary (i.e., unsystematic)
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The World Bank
Workshop on fiscal policy
IMF, June 2009
Three components of fiscal policy:
Most research has focused on identifying the effects of (3).
But it likely accounts for a relatively small fraction of the overall variation in fiscal variables – as implied by high R2 from projecting them on cyclical and other factors.
Nice to see (1) get some attention too.
Different in poor countries: smaller government, conventional stabilizers weak on the revenue side, and virtually absent on the expenditure side.
Latin America vs industrial countries
Source: Suescún 2007
Regressions of fiscal aggregates on cyclical indicators.
Some empirical support for both explanations – although based on crude measures of institutional quality and access to finance.
Automatic stabilizers: measurement
Dependent variable: public consumption growth
IV estimates, 121 countries, annual data (WDI dataset)
A closer look at LDC fiscal institutions could be illuminating.
But also: shocks in developing countries may be different.
If optimal policy is forward-looking, its response to current output changes (the focus of conventional regressions) may well be different in industrial and developing countries.
Effectiveness usually stated in terms of output stability – but consumption stability at least as important.
Methodologically, assessing effectiveness of automatic stabilizers is different from evaluating unsystematic policies: it involves evaluating rules – Lucas critique.
In principle one would need structural models with policy-invariant behavioral relations (like McCallum 1999 on systematic monetary policy).
Not many such exercises (Andrés, Doménech & Fatás 2008 is one)
Instead, reduced-form regressions of aggregate volatility on measures of cyclical response of budget – or even government size.
The relation between volatility and government size is different outside rich countries
Source: Perry, Servén and Suescún 2007
-- Nonlinearities: poor countries are below a “minimum government size” for the stabilizing effect to occur (the reverse of Buti et al 2003 for rich countries)
-- Composition effect: automatic stabilization is overwhelmed by procyclical discretionary policy
-- Shocks are different (as before)
Worth a closer look.
Automatic stabilizers vs discretionary policy
Some hints that the latter may be partly replacing the former since the 1990s (e.g., Debrun et al 2008, Auerbach 2009) – is that a good idea?
Not so clear that “automatic stabilizers are more effective” – what is the metric and evidence?
They do offer the advantages of speed, predictability and reversibility – especially valuable when fiscal institutions are weak
Aside from efficiency issues, the political economy of automatic stabilizers can be hard too: income taxation, tax enforcement etc – still big hurdles for many developing countries.