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Quantifying the Role Automatic Stabilisers Play in New Zealand Using a Macro-Simulation Approach

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Abstract
Automatic stabilisers are fiscal policy’s first line of defence in the face of adverse economic shocks. Automatic stabilisers capture fiscal policy’s automatic countercyclical response to the state of the business cycle, and are determined by factors like the progressivity of the tax system, the size of government and the amount of benefit spending that is dependent on recipients’ economic circumstances. Built into the system, they do not require legislative action each time they are implemented, meaning they can be deployed relatively quickly. In this paper I investigate the role automatic stabilisers play in stabilising the New Zealand economy across the business cycle. I benchmark current automatic stabilisation policy against different definitions of neutral fiscal policy to determine their contribution to stabilising the economy. I find the standard deviation of GDP could be up to 29% higher in a world without automatic stabilisers. Plausible gains from strengthening automatic stabilisers from current settings are likely to be much smaller. Automatic stabilisers play a larger role when monetary policy is constrained by the lower bo

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  • Andrew Binning, 2024. "Quantifying the Role Automatic Stabilisers Play in New Zealand Using a Macro-Simulation Approach," Treasury Working Paper Series 24/02, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:24/02
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    File URL: https://www.treasury.govt.nz/sites/default/files/2024-04/twp24-02.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    automatic fiscal stabilisers; macro-simulation; counter-factual policy simulation;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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