Automatic stabilisers and economic crisis: US vs Europe

Authors

Mathias Dolls, Clemens Fuest, Andreas Peichl

Publication Date

Jun 2010

Abstract

This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 31 per cent in the EU and up to 28 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view.

Publication type

EUROMOD Working Paper Series

Series Number

EM2/10

Research area

Tax and benefit systems

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• Automatic stabilizers and economic crisis: US vs. Europe

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