Cyclical Adjustment in Fiscal Rules: Some Evidence on Real-Time Bias for EU-15 Countries

Gerhard Kempkes

FinanzArchiv: Public Finance Analysis, 2014, vol. 70, issue 2, 278-315

Abstract: Most EU member states adopt national fiscal rules that refer to cyclically adjusted borrowing limits. Yet, trend increases in public debt caused by the cyclical components are only prevented if the real-time output gaps used to calculate cyclical components balance over time. We analyze real-time output gaps for EU-15 countries estimated by the EU (2002-2012), the IMF (2000-2012), and the OECD (1989-2012) and find a strong negative bias. Simulations suggest that this bias may well translate into considerable debt-ratio hikes. Our findings imply that fiscal rules should incorporate ex post checks of the unbiasedness of cyclical components and a corresponding correction mechanism.

Keywords: fiscal rules; cyclical adjustment; output gaps; real-time data; debt dynamics (search for similar items in EconPapers)
JEL-codes: E32 H68 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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DOI: 10.1628/001522108X681388

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