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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Enrique Alberola & Jose M González-Minguez & Pablo Hernandez-de-Cos & Jose M Marqués, 2005. "How cyclical do cyclically-adjusted balances remain? An EU study," Public Economics 0507004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwppe:0507004
    Note: Type of Document - pdf; pages: 32. published in Hacienda Pública Española, 166-(3/2003): 151-181
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/pe/papers/0507/0507004.pdf
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    References listed on IDEAS

    as
    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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    Cited by:

    1. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 5-33, November.
    2. Masten, Igor & Grdović Gnip, Ana, 2016. "Stress testing the EU fiscal framework," Journal of Financial Stability, Elsevier, vol. 26(C), pages 276-293.
    3. Jef Vuchelen & Jesse De Wit, 2008. "An Evaluation of the OECD Cyclically-Adjusted Primary Government Balance Forecasts," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 51(4), pages 459-479.

    More about this item

    Keywords

    Structural balances; output gap;

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H - Public Economics

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