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 ?
They concurred that, if this risk were to materialize, the government should let automatic fiscal stabilizers operate freely and provide targeted support to hard?hit sectors.
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.
(2002), "Automatic Fiscal Stabilizers in France", IMF Working Paper, November, No.
(2001), "Automatic Fiscal Stabilizers: Implications for New Zeeland", Working Paper No.
(2.) The recommendation of the design and implementation of automatic fiscal stabilizers within the mechanism of the fiscal policy is included in the Pact of Growth and Stability.
In Canada, the main automatic fiscal stabilizers are various types of tax revenues, as well as employment insurance payouts.
Automatic fiscal stabilizers are very effective in dampening an output cycle.
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.
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. We find that monetary policy typically switches toward aggressive expansion very soon after the peak in economic activity.
If downside risks to growth materialize, there is room for automatic fiscal stabilizers to act and monetary policy could play a supportive role, provided that inflation remains low.
Automatic fiscal stabilizers should operate fully to cushion lower growth.

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