Assessing the Dynamic Efficiency of Automatic Stabilizers

Abstract

The dynamic efficiency of selected stabilizers was measured by simulating three-year world activity and price cycles in a medium-size non-linear model of the Canadian economy (RDX1) and computing the proportion of variance (around control values) eliminated by the operation of the stabilizer(s). Such measures, calculated for several target variables, were compared at different levels of capacity utilization for both cyclical and sustained shocks. Almost all of the stabilizers were markedly less effective when the form of the shocks was cyclical, and many stabilizers were found to be destabilizing after the economy had been subjected to periodic shocks for six years.