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Automatic fiscal stabilisers in Estonia: the impact of economic fluctatios on general government budget balance

  • Rasmus Kattai

    ()

  • Alvar Kangur

    ()

  • Martti Randveer

    ()

The paper discusses the functioning of automatic fiscal stabilisers in Estonia. The aim of the research is to evaluate government budget sensitivity to economic fluctuations and thereby assess the importance of automatic fiscal stabilisers in Estonia. Specifically we are interested in whether the functioning of automatic fiscal stabilisers might under certain circumstances create difficulties for the fulfilment of the Maastricht deficit criterion according to which public deficit is not allowed to exceed the limit of 3% of GDP. The results of our research show that the role of automatic fiscal stabilisers is modest in Estonia. Budgetary sensitivity was approximately 0.35 in the period 1996-2001 - an increase in output gap by 1 percentage point causes a change in the budget balance by 0.35% of GDP. According to that maximum value, the budget's reaction was only 1.3% of GDP (while the output gap was -3.9%). A positive implication of this is that Estonia has good chances of holding the budget balance within the requested ceilings. If the output gap reaches -5%, structural deficit may still be 1% of GDP without the actual balance exceeding the 3% deficit boundary.

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File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2003/wp_1103.pdf
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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2003-11.

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Length: 25 pages
Date of creation: 10 Oct 2003
Date of revision: 10 Oct 2003
Publication status: published
Handle: RePEc:eea:boewps:wp2003-11
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  7. Kearney, Ide & McCoy, Daniel & Duffy, David & McMahon, Michael & Smyth, Diarmaid, 2000. "Assessing the Stance of Irish Fiscal Policy," Papers BP2001/1, Economic and Social Research Institute (ESRI).
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