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

Enrique Alberola (), Jose M González-Minguez, Pablo Hernandez-de-Cos and Jose Manuel Marqués Sevillano ()
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Jose M González-Minguez: Banco de España
Pablo Hernandez-de-Cos: Banco de España

Public Economics from EconWPA

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.

Keywords: Structural balances; output gap (search for similar items in EconPapers)
JEL-codes: D6 D7 H (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-pbe
Date: 2005-07-08
Note: Type of Document - pdf; pages: 32. published in Hacienda Pública Española, 166-(3/2003): 151-181
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Journal Article: How cyclical do cyclically-adjusted balances remain? An EU study (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwppe:0507004

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