Automatic stabilisers and economic crisis: US versus Europe

This paper analyses the effectiveness of the tax and transfer systems in the EU and the US to provide income insurance through automatic stabilisation in the recent economic crisis. We find that automatic stabilisers 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 is absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilisation of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilisers in eastern and southern Europe are much lower than in central and northern European countries. We also investigate whether countries with weak automatic stabilisers have enacted larger fiscal stimulus programs.
Clemens Fuest