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Cyclical adjustment in fiscal rules: Some evidence on real-time bias for EU-15 countries

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  • Kempkes, Gerhard
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    Abstract

    Most EU member states will adopt fiscal rules that refer to cyclically-adjusted borrowing limits. Under the standard cyclical adjustment procedure, trend increases in public debt based on cyclical components are prevented if the real-time output gaps used to calculate cyclical components balance over time. We analyse real-time output gaps for EU-15 countries over the 1996-2011 period as estimated by the EU, the IMF and the OECD. Compared to each institution's final estimate, we find that real-time output gaps in our sample period are negatively biased. This bias is observed (i) irrespective of the source of the data, (ii) in all real-time vintages, (iii) basically across the entire cross-section of countries. The magnitude of the bias is considerable: on average, real-time cyclical components as a percentage of GDP are biased downwards by about 0.5 percentage point per year. Our results suggest that fiscal rules should incorporate ex-post checks of the unbiasedness of the cyclical components used within the rule. Potential biases would then decrease or increase future borrowing limits. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 15/2012.

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    Date of creation: 2012
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    Handle: RePEc:zbw:bubdps:152012

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    Keywords: public finance; fiscal rules; cyclical adjustment;

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    Cited by:
    1. Christian Breuer, 2012. "Keine strukturelle Verbesserung der Haushaltslage – Zu den Ergebnissen der Steuerschätzung vom November 2012," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(22), pages 13-18, November.
    2. Boysen-Hogrefe, Jens, 2014. "Niedrige Zinsen und rasche monetäre Expansion: Was soll die Finanzpolitik tun?," Kiel Policy Brief 75, Kiel Institute for the World Economy (IfW).

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