![]() ![]() We also study the stabilization effect of alternative (distortionary) tax structures and find that these are only relevant if substantial rigidities are present. Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. During a recession, the government will need to take steps to mitigate economic harm. ![]() Fiscal policy is how the government spends money and taxes income in order to influence economic conditions. ![]() The paper investigates these channels and concludes that, contrary to what has been found in RBC models, distortionary taxes tend to reduce output volatility relative to lump-sum taxes when significant rigidities are present. Automatic stabilizers are a crucial part of governments’ fiscal policy. The channels through which fiscal policy affects macroeconomic stability include supply-side effects of distortionary taxes, the procyclical behavior of public spending induced by fiscal rules and the conventional effect of automatic stabilizers operating through disposable (permanent) income. This paper analyzes the effect of the fiscal structure upon the trade-off between inflation and output stabilization induced by technological shocks in a DGE model with nominal and real rigidities that also integrates a rich menu of fiscal variables as well as a target on the debt to output ratio. What are Automatic Stabilizers Automatic stabilizers are a type of fiscal policy deliberated to counterbalance fluctuations in the economy of a nation naturally without influence by government or. ![]()
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