Fiscal Stabilization Policy and Fiscal Institutions

In this paper we analyse counter-cyclical fiscal policy within the context of a microfounded analysis of business-cycle stabilization. We show that tax and spending instruments can have a useful counter-cyclical role, even after allowing for the distortionary nature of the instruments and the need for debt sustainability. A critical barrier to the use of fiscal instruments may be political economy concerns, and we survey recent suggestions involving alternative fiscal policy institutions.