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Mind the Gap – Watch the Ways of Cyclical Adjustment of the Budget Balance

Author

Listed:
  • Gábor P. Kiss

    () (Magyar Nemzeti Bank)

  • Gábor Vadas

    () (Magyar Nemzeti Bank)

Abstract

Cyclically adjusted budget deficit (CAB) is a widely cited and used concept in the evaluation of fiscal situation. The key idea behind it is to separate temporary and/or non-discretionary effects on budget deficit from the underlying balance and/or effects of discretionary measures of fiscal policy. The computation of CAB is based on the identification of potential level of economic variables. In this paper we demonstrate, that composition matters both in the case of real and nominal variables. Both European Commission and European Central Bank propose methods for measuring CAB, however, they are not fully capable of satisfying all requirements. Besides, results show that aggregated and disaggregated approaches provide different estimations for the benefit of the latter. In this paper we present an alternative method, which is able to incorporate the advantages of both approaches. Combining output gap from production function and constrained multivariate HP filter induces theoretically motivated disaggregated approach where we also exploit the implication of production function parameterisation. Taking into account nominal features, for example nominal elements of the tax code or deflators directly affected by the government, the more precise definition of discretionary measures became also important.

Suggested Citation

  • Gábor P. Kiss & Gábor Vadas, 2004. "Mind the Gap – Watch the Ways of Cyclical Adjustment of the Budget Balance," MNB Working Papers 2004/7, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2004/7
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    File URL: http://www.mnb.hu/letoltes/wp2004-7v.pdf
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    Cited by:

    1. Paweł Borys & Piotr Ciżkowicz & Andrzej Rzońca, 2014. "Panel Data Evidence on the Effects of Fiscal Policy Shocks in the EU New Member States," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 189-224, June.
    2. Orban, Gabor & Szapary, Gyorgy, 2004. "The Stability and Growth Pact from the perspective of the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 839-864, October.
    3. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
    4. Vlasov, S. & Ponomarenko, A., 2010. "The Role of Budget Policy under the Financial and Economic Crisis," Journal of the New Economic Association, New Economic Association, issue 7, pages 111-133.

    More about this item

    Keywords

    cyclically adjusted budget deficit; price gap; business cycles; constrained multivariate HP filter.;

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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