Automatic Stabilization and Fiscal Policy: Some Quantitative Implications for Latin America and the Caribbean

Nov 2012
This paper provides an estimation of the size of income and demand automatic stabilizers in a representative sample of Latin American and Caribbean (LAC) countries. The authors find that when a negative unemployment shock hits the economy, the size of income and demand automatic stabilizers coefficients is much smaller than the size of these coefficients in Europe and the United States. This evidence suggests that there is room for policies that can enlarge the absorption by these coefficients as a way to contribute to macroeconomic stability in LAC countries. The paper analyzes four policies affecting the income stabilization coefficient and two others affecting directly the demand stabilization coefficient. The main results suggest that changing the minimum tax exemption and its progressiveness using the tax structure of middle-income countries outside the LAC region is the best option to enlarge the size of the income and demand stabilization coefficients, and in this way to reduce the need of discretionary fiscal policies in theregion.