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Early warning or just wise after the event? The problem of using cyclically adjusted budget deficits for fiscal surveillance

Author

Listed:
  • Andrew Hughes Hallett
  • Rasmus Kattai
  • John Lewis
Abstract
The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time dataset containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of OECD economic outlook. We find that data revisions are so great that real-time CABs have low power in detecting fiscal slippages as defined by the ex post data.

Suggested Citation

  • Andrew Hughes Hallett & Rasmus Kattai & John Lewis, 2007. "Early warning or just wise after the event? The problem of using cyclically adjusted budget deficits for fiscal surveillance," Bank of Estonia Working Papers 2007-02, Bank of Estonia, revised 09 Feb 2007.
    • Handle: RePEc:eea:boewps:wp2007-02
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    References listed on IDEAS

    as
    1. Buti, M. & Eijffinger, S.C.W. & Franco, D., 2003. "Revisiting the Stability and Growth Pact : Grand Design or Internal Adjustment?," Other publications TiSEM 2e5a01d9-9a1f-492d-995f-a, Tilburg University, School of Economics and Management.
    2. de Haan, Jakob & Berger, Helge & Jansen, David-Jan, 2003. "The end of stability and growth pact?," Discussion Papers 2003/16, Free University Berlin, School of Business & Economics.
    3. Pierre St-Amant & Simon van Norden, 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    4. Giuliodori, Massimo & Beetsma, Roel, 2008. "On the relationship between fiscal plans in the European Union: An empirical analysis based on real-time data," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 221-242, June.
    5. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    6. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, vol. 44(7), pages 1259-1289, June.
    7. Alain Guay & Pierre Saint-Amant, 2005. "Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles?," Annals of Economics and Statistics, GENES, issue 77, pages 133-155.
    8. Forni, Lorenzo & Momigliano, Sandro, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," MPRA Paper 4315, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nilsson, Kristian, 2008. "Conceptual Framework for Fiscal Policy," Occasional Papers 16, National Institute of Economic Research.
    2. Andrew Hughes Hallett & Rasmus Kattai & John Lewis, 2009. "Can we rely on real time figures for cyclically adjusted budget balances?," Bank of Estonia Working Papers 2009-2, Bank of Estonia, revised 20 Oct 2009.
    3. Larch, Martin & Cugnasca, Alessandro & Kumps, Diederik & Orseau, Eloïse, 2019. "Fiscal policy and the assessment of output gaps in real time: An exercise in risk management," ZEW Discussion Papers 19-013, ZEW - Leibniz Centre for European Economic Research.
    4. Cepparulo, Alessandra & Gastaldi, Francesca & Giuriato, Luisa & Sacchi, Agnese, 2011. "Budgeting versus implementing fiscal policy:the Italian case," MPRA Paper 32474, University Library of Munich, Germany.
    5. Staehr, Karsten, 2008. "Fiscal policies and business cycles in an enlarged euro area," Economic Systems, Elsevier, vol. 32(1), pages 46-69, March.
    6. Andrew Hughes Hallett, 2008. "Coordination without Explicit Cooperation: Monetary-Fiscal Interactions in an Era of Demographic Change," European Economy - Economic Papers 2008 - 2015 305, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Hughes Hallett, Andrew & Bernoth, Kerstin & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
    8. Bernoth, Kerstin & Hughes Hallett, Andrew & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
    9. Giuliodori, Massimo & Beetsma, Roel, 2008. "On the relationship between fiscal plans in the European Union: An empirical analysis based on real-time data," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 221-242, June.
    10. Richard C.K. Burdekin & King Banaian & Mark Hallerberg & Pierre L. Siklos, 2011. "Fiscal and monetary institutions and policies: onward and upward?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(4), pages 340-354, November.

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    More about this item

    Keywords

    fiscal surveillance; cyclically adjusted budget balance; real time data;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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