|Author (Person)||Fatás, Antonio|
|Author (Corporate)||European Parliament: DG Internal Policies|
|Publisher||European Parliament: European Parliamentary Research Service (EPRS)|
|Series Title||In-Depth Analysis|
|Series Details||PE 634.399|
|Publication Date||May 2019|
|Content Type||Research Paper|
Since 2008, and as the result of central banks reaching the zero-lower bound, fiscal policy has come back as a potential, possibly primary, tool to stabilize business cycles. We present evidence that European countries have historically relied on automatic stabilisers for counter-cyclical policies, while discretionary fiscal policy has been pro-cyclical (unlike in the US). Pro-cyclical fiscal policies became so strong in the years 2010-14 that they completely eliminated the benefits of automatic stabilisers. Looking forward, there are calls to strengthen automatic stabilisers.
We argue in this paper that without addressing the reasons behind the pro-cyclicality of discretionary policy, this cannot be a solution. Strengthening automatic stabilisers faces similar challenges and trade-offs as proposals to make discretionary policy more countercyclical.
|Subject Categories||Economic and Financial Affairs|
|Subject Tags||Economic Governance | Situation|
|International Organisations||European Union [EU]|