Automatic Fiscal Stabilisers in the Euro Area – Simulations with the Nime Model

Meyermans investigates how automatic fiscal stabilisers affect economic activity in the euro area. To this end he applies different shocks to an econometric model of the world economy (NIME) developed at the Belgian Federal Planning Bureau. He compares the adjustment path of the main macroeconomic variables under a regime that allows the automatic fiscal stabilisers to operate fully, with the adjustment path under a regime that tempers the working of the automatic fiscal stabilisers. The author also compares the results for the euro area with those for the United States and Japan. He points out that previous studies of the euro area found that output fluctuations are reduced significantly when automatic stabilisers are allowed to operate. In line with this literature, Meyermans finds that the impact of shocks on output is smaller with fiscal stabilisers. However, he finds that this only holds for shocks of a temporary nature. Moreover, he also notices that these results are obtained under the assumption of a well disciplined government that allows the automatic stabilisers to operate in a downturn and uses the gains in the upturn to reduce the debt