automatic stabilizers

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Automatic Stabilizers

Systems that involuntarily shore up GDP without any action by a government. For example, when a recession occurs, taxes usually decrease because persons and corporations make less. This gives them extra money to spend or invest, which helps GDP remain higher than it would otherwise. Most economists agree that automatic stabilizers work in the short term. They are also called automatic fiscal stabilizers and built-in stabilizers.

automatic (built-in) stabilizers

elements in FISCAL POLICY that serve to automatically reduce the impact of fluctuations in economic activity. A fall in NATIONAL INCOME and output reduces government TAXATION receipts and increases its unemployment and social security payments. Lower taxation receipts and higher payments increase the government's BUDGET DEFICIT and restore some of the lost income (see CIRCULAR FLOW OF NATIONAL INCOME MODEL). See FISCAL DRAG.
References in periodicals archive ?
Those advanced and emerging economies which have fiscal space will let the automatic fiscal stabilizers to operate taking into account national circumstances and current demand conditions.
This paper presents theoretical and empirical analysis of automatic fiscal stabilizers.
Together, these results showing strong ties between cyclical variation in income and federal government spending and taxes suggest the potential for the automatic fiscal stabilizers to play a quantitatively important role in the economic stabilization process.
Using the Federal Reserve Board's FRB/US quarterly econometric model, however, we find that the automatic fiscal stabilizers play a rather limited role in damping the short-run effect of aggregate demand shocks on real GDP, reducing the "multiplier" by about 10 percent, although they have a somewhat larger damping impact (in percentage terms) on personal consumption expenditures.
Finally--noting that FRB/US is approximately linear, so that positive and negative shocks of equal size have roughly the same absolute effect on the major endogenous variables--our simulation results shed light on the issue of whether the presence of automatic fiscal stabilizers reduces the variance of U.
Using the modern theory of consumption behavior, we identify several channels through which the optimal reaction of household consumption plans to aggregate income shocks is tempered by the automatic fiscal stabilizers.
Such results suggest the potential for the automatic fiscal stabilizers to play a quantitatively important role in the economic stabilization process.
economy--FRB/US--the automatic fiscal stabilizers are found to play a modest role in damping the short-run effect of aggregate demand shocks on real GDP, reducing the multiplier by about 10 percent, although they have a somewhat larger damping impact (in percentage terms) on personal consumption expenditures.
We use the change in the real federal funds rate as our measure of discretionary monetary policy, the change in the ratio of the high-employment surplus to trend GDP as our measure of discretionary fiscal policy, and the ratio of the difference between the actual surplus and the high-employment surplus to trend GDP as our measure of automatic fiscal stabilizers.

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