Automatic Stabilizers and Economic Crisis: US vs. Europe

This paper analyzes the e¤ectiveness of the tax and transfer systemsin the European Union and the US to act as an automatic stabilizer in the currenteconomic crisis. We …nd that automatic stabilizers absorb 38 per cent of a propor-tional income shock in the EU, compared to 32 per cent in the US. In the case ofan unemployment shock 47 per cent of the shock are absorbed in the EU, comparedto 34 per cent in the US. This cushioning of disposable income leads to a demandstabilization of up to 30 per cent in the EU and up to 20 per cent in the US. Thereis large heterogeneity within the EU. Automatic stabilizers in Eastern and SouthernEurope are much lower than in Central and Northern European countries. We alsoinvestigate whether countries with weak automatic stabilizers have enacted larger…scal stimulus programs. We …nd no evidence supporting this view.