Automatic Stabilizers in an Economy with Multiple Shocks

A stochastic general equilibrium model is set up in order to analyse whether automatic stabilizers are a good tool in terms of mitigating risk. It is found that the potential benefits to be derived from automatic stabilizers depend on various factors including the degree of real wage rigidity and the size of the public sector. In countries with large public sectors automatic stabilizers in the sense of procyclical tax revenues can provide significant welfare improvements compared with a passive fiscal policy. For countries with smaller public sectors the predictions of the model are less favorable