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Measuring the Cycle and Structural Shocks

Author

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  • Marta Lopresto

    (National Institute of Economic and Social Research)

  • Garry Young

    (National Institute of Economic and Social Research)

Abstract

The rules that guide fiscal policy in many countries are often specified in terms of cyclically-adjusted measures of the budget deficit. Accounting for the cycle is important because public finances are flattered when the economy is cyclically strong. However measuring the cycle is difficult as the uncertainty surrounding estimates of potential output is significant, especially when the economy is hit by structural shocks. As a consequence, a fiscal framework targeting measures of cyclically-adjusted budget positions and point forecasts has led to spending and taxes being influenced by contentious forecasting assumptions. A more robust approach would take account of the unreliability of the cyclical adjustment or forecasts. A suggestion is to focus on risks around medium-term fiscal forecasts, supported by an independent watchdog. This would contribute to sustainable policy, while avoiding excess sensitivity to forecasts.

Suggested Citation

  • Marta Lopresto & Garry Young, 2019. "Measuring the Cycle and Structural Shocks," The Economic and Social Review, Economic and Social Studies, vol. 50(1), pages 103-117.
    • Handle: RePEc:eso:journl:v:50:y:2019:i:1:p:103-117
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    References listed on IDEAS

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    1. Jonathan Portes & Simon Wren-Lewis, 2015. "Issues in the Design of Fiscal Policy Rules," Manchester School, University of Manchester, vol. 83, pages 56-86, September.
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    Keywords

    fiscal policy; structural shocks;

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