How Important are Automatic Stabilisers in Europe? A Stochastic Simulation Assessment

In this paper we formalize budgetary stabilisers as a set of simple policy rules, and assess their operation in an uncertain environment by performing stochastic simulations in a forward-looking multi-country macroeconometric model, NiGEM, comprising individual blocks for 10 Euroland economies. Automatic stabilisers make output volatility decrease by 11 per cent for Euroland as a whole Ð less than in previous studies, as these have overemphasised demand shocks. We also find that, provided countries comply with their announced fiscal consolidation programmes, built-in stabilisers and the Stability and Growth Pact are broadly compatible.