Salle 3001

Olivier BLANCHARD (Petersen Institute for International Economics) “The case for quasi automatic stabilizers, with an application to a varying VAT”

Abstract: Most of the focus of recent stabilization policy research and practice has been on monetary rather than fiscal policy.  At the same time, the limits of monetary policy, in particular the constraints imposed by the effective lower bound on nominal interest rates, have become more obvious, suggesting a need for a stronger role for fiscal policy.  Indeed, fiscal policy, with its large potential set of instruments, would seem to have an important role to play.  The case for fiscal policy as a stabilization tool suffers however from some well-known problems.  In addition to decision and implementation lags, political economy considerations imply that giving more room to fiscal policy may lead to excessive debt financing, an issue known as debt bias. In the current context in which public debt is historically high, debt bias is even more costly.

The argument of this paper is that, at least on paper, the way to use more actively fiscal policy for stabilization purposes and avoid the resulting debt bias, is to design and use debt-neutral quasi-automatic stabilizers.  Two words are important here.  “Quasi”‘ indicates that, in contrast to truly automatic stabilizers, the trigger has to be some observable variable, such as measured GDP or unemployment.  “Debt-neutral” indicates that, while they lead to variations in the primary balance in the short run, they must designed to have no long run effect on the debt level.

Quasi-automatic stabilizers can work through a combination of income and substitution effects.  Some, like those which make unemployment benefit duration a function of the unemployment rate, work mostly through income effects; some, such as varying investment tax credits or varying VAT rates, rely more on substitution effects.  As the potential and actual effects of varying unemployment benefit duration have been studied at some length, this paper focuses on the design and the potential effects of variable VAT rates.

Organizer : Gauthier Vermandel