2013/04/01 by Alisdair McKay, Ricardo Reis · 1 citation
Economics, Econometrics and Finance · #Economic Theory and Policy #Economic theories and models #Monetary Policy and Economic Impact
paper · pdf · doi:10.3386/w19000
openalex publication_date 2013/04/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures how effective they are. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data, as well as the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role on the effectiveness of the stabilizers, whereas tax-and-transfer programs that affect inequality and social insurance can have a large effect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the United States has barely had any effect on volatility. According to our model, expanding safety-net programs, like food stamps, has the largest potential to enhance the effectiveness of the stabilizers.