What is the impact of tax and welfare reforms on fiscal stabilisers? A simple model and an application to EMU

Abstract

Reforms aiming at lowering the tax burden and cutting social benefits may boost efficiency and output, and improve market adjustment to shocks, but, by reducing the size of automatic stabilisers, may also imply less cyclical smoothing. This would be problematic in EMU given the loss of national monetary autonomy. This paper argues that the alleged trade-off between efficiency/flexibility and stabilisation depends on the typology of shocks affecting the economy.taxation, tax reforms, fiscal policy, social welfare, social benefits, fiscal stabilisers, automatic stabilisers, economic and monetary union, EMU, shocks, Buti, Van den Noord