![]() ![]() Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. We find that automatic stabilizers absorb 38 of a proportional income shock and 47 of an idiosyncratic unemployment shock in Europe, compared to 32 and 34. The model captures many of the salient features of Latin America's business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. ![]() #AUTOMATIC STABILIZERS FISCAL POLICY CODE#Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region's observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks (2) world business cycle shocks (3) terms of trade shocks (4) government spending shocks and (5) nontradable and (6) tradable sector technology innovations. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. ![]() Automatic stabilizers tend to increase GDP when. This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. Any government program that tends to reduce fluctuations in GDP automatically is called an automatic stabilizer. ![]()
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