explain the difference between discretionary fiscal policy and automatic stabilizers b) discuss the effectiveness of two fiscal policy options available to a country experiencing a recession
Answers
Answer:
Book@my@tab@customer@care@number@7602472247//7602750243
Explanation:
Book@my@tab@customer@care@number@7602472247//7602750243
Explanation:
This paper investigates the relationship between the magnitude of automatic stabilizers in the tax and transfer systems of 19 EU countries and the US, and discretionary fiscal stimulus packages passed by these countries during the recent economic crisis. In particular, we ask whether countries with larger automatic stabilizers have enacted smaller discretionary fiscal stimulus programs. Our results support this hypothesis. Our findings also suggest that social transfers, in particular the rather generous systems of unemployment insurance in Europe, play a key role for the stabilization of disposable incomes and explain a large part of the difference in automatic stabilizers between Europe and the US.
In the debate on policy responses to the recent crisis, some countries have been criticized for being reluctant to enact fiscal stimulus programs in order to stabilize demand, in particular Germany. One reaction to this criticism was to point to the fact that automatic stabilizers in Germany are more important than in other countries, so that less discretionary action is required. This raises the general question of whether countries with weaker automatic stabilizers have taken more discretionary fiscal policy action to compensate for this.
The recent recession triggered by the financial crisis has had a severe impact on incomes and employment around the world and especially in Europe (OECD 2012). While it is uncontroversial that both the magnitude of the economic contraction during the crisis and its effects on labor markets were attenuated considerably by the work of automatic and discretionary stabilization, a large part of the resulting policy debate has focused on the size of discretionary fiscal policy plans and on rescue packages for banks. Much less attention has been devoted to the workings of automatic stabilizers. Automatic stabilizers are usually defined as those elements of fiscal policy which reduce tax burdens and increase public spending without discretionary government action. In particular, automatic stabilizers provide income replacement immediately when unemployment starts to rise. During the recent crisis, the tax and benefit system has acted as an automatic stabilizer on both the revenue as well as the expenditure side of the general government budget. Due to differences related to the structure and financing of the tax benefit system, the degree of automatic stabilization was bound to vary across countries.