IDEAS home Printed from https://ideas.repec.org/p/fca/wpfnca/2003-10.html
   My bibliography  Save this paper

Fiscal Planning in an Era of Economic Stability

Author

Listed:
  • Doug Hostland

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 temps, nous calibrons un modèle de simulation stochastique afin de reproduire la performance des prévisions dans le secteur privé au cours de la période historique. Les expériences de simulation stochastique permettent d’illustrer l’influence de l’incertitude entourant les prévisions économiques sur la réduction de la dette. Nous avons constaté que la réduction de l’incertitude dans les prévisions observée au cours de la période historique a une incidence majeure sur la dispersion de la réduction de la dette lorsque le cadre de planification budgétaire comprend des engagements sur plusieurs périodes à l’égard de mesures touchant les recettes ou les dépenses. De plus, les résultats de la simulation indiquent qu’en stabilisant l’inflation et en établissant des prévisions prudentes au chapitre de la croissance de la production, on peut faire en sorte que le ratio de la dette au PIB se maintienne fermement sur une pente descendante face à l’incertitude entourant les développements économiques.

Suggested Citation

  • Doug Hostland, "undated". "Fiscal Planning in an Era of Economic Stability," Working Papers-Department of Finance Canada 2003-10, Department of Finance Canada.
  • Handle: RePEc:fca:wpfnca:2003-10
    as

    Download full text from publisher

    File URL: http://www.fin.gc.ca/scripts/Publication_Request/request2_e.asp?doc=wp2003-10e.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

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

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mr. Philippe D Karam & Mr. Douglas Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers 2005/226, International Monetary Fund.
    2. David Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
    3. Dr. Gregor Bäurle & Daniel Kaufmann, 2014. "Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes," Working Papers 2014-10, Swiss National Bank.
    4. Lucian Croitoru, 2016. "Are We Systematically Wrong when Estimating Potential Output and the Natural Rate of Interest?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 128-151, June.
    5. Weymark, Diana N., 2004. "Economic structure, policy objectives, and optimal interest rate policy at low inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 25-51, March.
    6. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July.
    7. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
    8. Lars E. O. Svensson, 1999. "Monetary policy issues for the Eurosystem," Proceedings, Federal Reserve Bank of San Francisco.
    9. John B. Taylor & Volker Wieland, 2012. "Surprising Comparative Properties of Monetary Models: Results from a New Model Database," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 800-816, August.
    10. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    11. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    12. Jürgen Von Hagen, 1999. "Macroeconomic Consequences of the EMU," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(4), pages 359-374, December.
    13. Davis, George & Kanago, Bryce, 1998. "High and Uncertain Inflation: Results from a New Data Set," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 218-230, May.
    14. Olatunji A. Shobande & Oladimeji T. Shodipe & Simplice A. Asongu, 2019. "Global Shocks Alert and Monetary Policy Responses," Research Africa Network Working Papers 19/066, Research Africa Network (RAN).
    15. Bletzinger, Tilman & Lalik, Magdalena, 2017. "The impact of constrained monetary policy on fiscal multipliers on output and inflation," Working Paper Series 2019, European Central Bank.
    16. Wändi Bruine de Bruin & Michael F. Bryan & Simon M. Potter & Giorgio Topa & Wilbert Van der Klaauw, 2008. "Rethinking the measurement of household inflation expectations: preliminary findings," Staff Reports 359, Federal Reserve Bank of New York.
    17. Alexander L. Wolman, 1998. "Staggered price setting and the zero bound on nominal interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-24.
    18. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    19. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
    20. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fca:wpfnca:2003-10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gustavo Durango (email available below). General contact details of provider: https://edirc.repec.org/data/fingvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.