Automatic stabilizers and economic crisis: US vs. Europe

This paper analyzes the effectiveness of the tax and transfer systems in the EU and the US to provide income insurance through automatic stabilization in the recent economic crisis. We find that automatic stabilizers absorb 38% of a proportional income shock in the EU, compared to 32% in the US. In the case of an unemployment shock 47% of the shock is absorbed in the EU, compared to 34% in the US. This cushioning of disposable income leads to a demand stabilization of up to 30% in the EU and up to 20% in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. ► Stabilizers stronger in Europe than in US, effectiveness depends on type of shock. ► Large heterogeneity within Europe, weak stabilizers in Southern and Eastern Europe. ► Possible range for demand stabilization taking into account liquidity constraints. ► Stabilizers positively (negatively) correlated with openness (active fisc. policy).