In this lecture, Olivier Blanchard (MIT), will present his paper 'Fiscal policy as a stabilization tool. The case for quasi-automatic stabilizers, with an application to VAT'.
Most of the focus of recent stabilization policy research and practice has been on monetary rather than fiscal policy. This paper argues that, given the limits on monetary policy, fiscal policy should play a larger role. Because of the well known problems with fiscal policy in general, it argues that we should develop quasi-automatic stabilizers, changes in taxes or transfers triggered by an aggregate variable. It discusses design issues, in particular how to make them debt neutral, and what aggregate trigger to use. It then focuses on a specific stabilizer, a variable VAT rate. It shows its effect in a minimalist NK model, and then discusses a number of analytical issues, both within and out of the minimalist model, such as the implications for inflation, the choice of the tax base, the implications of liquidity constraints, the implication of anticipation effects. It ends by reviewing the empirical evidence on passthrough of VAT changes, and the effects on demand of VAT changes, permanent or temporary.