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Fiscal Planning in an Era of Economic Stability

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  • Hostland Doug

Abstract

Recent research has shown that the volatility of output growth and inflation has declined over time in Canada, and most other industrialized countries. This paper examines the implications for medium-term fiscal planning at the federal level in Canada. We examine the performance of mean forecasts of output growth and inflation obtained from surveys of private sector forecasters in Canada and the US. The results indicate a substantial decline in forecast uncertainty since the mid-1980s. We then calibrate a stochastic simulation model to match the performance of private sector forecasts over the historical period. Stochastic simulation experiments are used to illustrate how varying the amount of uncertainty surrounding economic forecasts influences debt reduction outcomes. The reduction in forecast uncertainty observed over the historical period is found to have a major impact on the dispersion of debt reduction outcomes when the fiscal planning framework involves multi-period commitments to tax and spending measures. The simulation results also demonstrate that keeping inflation stable and avoiding over-optimistic estimates of potential output growth help ensure that the debt-to-GDP ratio is kept on a clear, downward profile in the presence of uncertainty surrounding economic developments. Des recherches récentes ont révélé une réduction progressive de la volatilité de la croissance de la production et de l’inflation au Canada et dans la plupart des pays industrialisés. Dans le présent document, nous étudions les répercussions de ce phénomène sur la planification budgétaire à moyen terme dans l’administration fédérale au Canada. Dans un premier temps, nous examinons la performance des prévisions moyennes liées à la croissance de la production et à l’inflation établies par des prévisionnistes du secteur privé au Canada et aux États-Unis. Les résultats démontrent une réduction marquée de l’incertitude dans les prévisions depuis le milieu des années 80. Dans un deuxième
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  • Hostland Doug, 2010. "Fiscal Planning in an Era of Economic Stability," EcoMod2002 330800035, EcoMod.
    • Handle: RePEc:ekd:003308:330800035
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    1. Douglas Hostland, "undated". "Monetary Policy and Medium-Term Fiscal Planning," Working Papers-Department of Finance Canada 2001-20, Department of Finance Canada.
    2. Coenen Günter & Orphanides Athanasios & Wieland Volker, 2004. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, February.
    3. Patrick Georges & Nicolas Moreau, "undated". "Prudence, Scope for Reducing Program Spending and Policy Rules on Medium-Term Fiscal Planning," Working Papers-Department of Finance Canada 2002-10, Department of Finance Canada.
    4. Derek Hermanutz & Chris Matier, "undated". "Modelling Federal Finances under Uncertainty," Working Papers-Department of Finance Canada 2000-02, Department of Finance Canada.
    5. David Longworth, 2002. "Inflation and the Macroeconomy: Changes from the 1980s to the 1990s," Bank of Canada Review, Bank of Canada, vol. 2002(Spring), pages 3-18.
    6. Patrick Georges & Nicolas Moreau, "undated". "Enrichments to Multi-Year Fiscal Commitments in the Presence of Uncertainty," Working Papers-Department of Finance Canada 2002-11, Department of Finance Canada.
    7. Kevin L. Kliesen & Daniel L. Thornton, 2001. "The expected federal budget surplus: how much confidence should the public and policymakers place in the projections?," Review, Federal Reserve Bank of St. Louis, vol. 83(Mar), pages 11-24.
    8. Doug Hostland & Chris Matier, "undated". "An examination of alternative Strategies for Reducing Public Debt in the Presence of Uncertainty," Working Papers-Department of Finance Canada 2001-12, Department of Finance Canada.
    9. Thomas Dalsgaard & Alain de Serres, 1999. "Estimating Prudent Budgetary Margins for 11 EU Countries: A Simulated SVAR Model Approach," OECD Economics Department Working Papers 216, OECD Publishing.
    10. Grace Juhn & Prakash Loungani, 2002. "Further Cross-Country Evidence on the Accuracy of the Private Sector's Output Forecasts," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-4.
    11. Doug Hostland, "undated". "Specification of a Stochastic Simulation Model for the Analysis of Monetary and Fiscal Policy," Working Papers-Department of Finance Canada 2001-14, Department of Finance Canada.
    12. John A. Carlson, 1977. "A Study of Price Forecasts," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 27-56, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.

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