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How cyclical do cyclically-adjusted balances remain? An EU study

  • Enrique Alberola

    (Banco de España)

  • Jose M González-Minguez

    (Banco de España)

  • Pablo Hernandez-de-Cos

    (Banco de España)

  • Jose M Marqués

    (Banco de España)

Observed budget balances are an imperfect indicator of the fiscal policy stance, because fluctuations in economic activity induce automatic changes in the balance, hence the use of cyclically-adjusted balances (CAB). However, this paper shows that CABs (as measured through one of the two methods currently used by the Commission) tend to be systematically overestimated during downturns and underestimated during expansions. The dominant source of this distortion arises from the filtering of revenues deemed to be cyclical, possibly signalling a problem with the computation of elasticities. The effect of the items which are assumed not to move with the cycle is non significant, but this overall result conceals offseting effects: public investment turns to be significantly procyclical and interest payments and transfers to firms are countercyclical.

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File URL: http://econwpa.repec.org/eps/pe/papers/0507/0507004.pdf
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Paper provided by EconWPA in its series Public Economics with number 0507004.

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Length: 32 pages
Date of creation: 08 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwppe:0507004
Note: Type of Document - pdf; pages: 32. published in Hacienda Pública Española, 166-(3/2003): 151-181
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
  2. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
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