Cyclically adjusted budget balance (CAB) is a widely cited and widely used concept in the evaluationof fiscal situations. The key idea behind it involves the identification of potential levels of economic variables.There are two recently used methods: the aggregate approach and the unconstrained disaggregateapproach. In this paper we apply them on USA, Japan and 25 EU member countries to demonstratethat both approaches could be the source of considerable bias. While the aggregate approachcannot cope with different shocks, the unconstrained disaggregate method involves systematic biasand do not contain theoretical consideration. In order to avoid these distortions we present an alternativeframework, which is able to incorporate the advantages of both approaches. Combining arbitraryoutput gap and constrained multivariate HP filter induces theoretically motivated disaggregation wherewe also exploit the implication of production function parameterisation. We found that the price effectresulting from the composition effect of different deflators could play an important role in evaluation ofthe fiscal position. To display the importance of composition effect we analyse the cyclical componentsof Finnish, Hungarian and Italian budget balances more in detail.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by EconWPA in its series Public Economics with number
0512010.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)