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Title: Joint estimates of automatic and discretionary fiscal policy: the OECD 1981-2003

Author(s): Julia Darby and Jacques Melitz

Publication Date: April 2011

Keyword(s): automatic stabilization, discretionary fiscal policy, government social and health spending, Maastricht Treaty, real time reaction functions and Stability and Growth Pact

Programme Area(s): International Macroeconomics

Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981-2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.

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Bibliographic Reference

Darby, J and Melitz, J. 2011. 'Joint estimates of automatic and discretionary fiscal policy: the OECD 1981-2003'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8342