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Measuring Structural Budget Balances in a Fast Growing Economy: The Case of Ireland

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  • Cronin, David

    (Central Bank and Financial Services Authority of Ireland)

  • McCoy, Daniel

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The most popular method of measuring structural budget balances is the “gaps plus elasticities” approach. Abtract: In this paper, it is argued that the idiosyncratic features of an economy need to be accounted for properly when seeking to achieve good estimates of structural budget balances using this method. The first step in this approach involves measuring the economy’s potential output in order to identify an output gap that indicates the economy’s cyclical position. There are two main approaches to measuring potential output - a production function approach and a trend smoothing approach. The paper highlights how estimates of potential output growth can vary quite considerably between these two approaches in an economy such as Ireland due to the manner in which the high mobility of productive factors can impact on the production function approach and in how very high recent growth rates impact on the trend smoothing approach. The second step of the gap plus elasticities approach requires measuring the sensitivity of revenue and expenditure items to the output gap in the form of an elasticity. In the standard estimation procedure, these elasticities are generally assumed to remain constant over the cycle. Evidence from Ireland, however, suggests that an assumption of constant elasticity values is unlikely to be plausible in practice. On the contrary, cyclically-sensitive fiscal policy will introduce time-variance into elasticity measures. There may be a need, therefore, to assess and quantify the significance and consequences of time variance in elasticity measures and its implications for structural budget balance estimation.

Suggested Citation

  • Cronin, David & McCoy, Daniel, 1999. "Measuring Structural Budget Balances in a Fast Growing Economy: The Case of Ireland," Research Technical Papers 4/RT/99, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:4/rt/99
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    References listed on IDEAS

    as
    1. Bradley, John & Whelan, Karl, 1997. "The Irish expansionary fiscal contraction: A tale from one small European economy," Economic Modelling, Elsevier, vol. 14(2), pages 175-201, April.
    2. Brox, James A, 1984. "A Note on Capacity Utilization, Productivity, and the Canadian Output Gap," Empirical Economics, Springer, vol. 9(3), pages 131-138.
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    Cited by:

    1. Duffy, David & Hore, Jonathan & MacCoille, Conall & McCoy, Daniel, 2001. "Budget 2002: Macroeconomic Context and Fiscal Stance," Papers BP2002/1, Economic and Social Research Institute (ESRI).
    2. Cronin, David & McQuinn, Kieran, 2020. "The (Pro-) Cyclicality of Fiscal Policy in the EU and Governments’ Expectations of Future Output Growth: New Evidence," Papers WP683, Economic and Social Research Institute (ESRI).
    3. Kearney, Ide & McCoy, Daniel & Duffy, David & McMahon, Michael & Smyth, Diarmaid, 2000. "Assessing the Stance of Irish Fiscal Policy," Papers BP2001/1, Economic and Social Research Institute (ESRI).
    4. repec:esr:chaptr:jacb200010 is not listed on IDEAS
    5. repec:esr:chaptr:jacb200113 is not listed on IDEAS
    6. Duffy, David, 1999. "Budget 2000: A Macroeconomic Perspective," Papers BP2000/1, Economic and Social Research Institute (ESRI).
    7. David Cronin & Kieran McQuinn, 2018. "The Cyclicality of Irish Fiscal Policy Ex-Ante and Ex-Post," The Economic and Social Review, Economic and Social Studies, vol. 49(1), pages 1-16.
    8. P. Kiss, Gábor & Vadas, Gábor, 2005. "Légy résen! Az államháztartási egyenleg ciklikus igazítása [Be on your guard! Cyclically adjusted budget deficit]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 109-129.
    9. David Cronin & Kieran McQuinn, 2021. "The (pro-) cyclicality of government consumption in the EU and official expectations of future output growth: new evidence," International Economics and Economic Policy, Springer, vol. 18(2), pages 331-345, May.
    10. repec:esr:chaptr:jacb199913 is not listed on IDEAS
    11. McHale, John, 2000. "Options for Inflation Control," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2000(3-Septemb), pages 1-18.
    12. repec:esr:chaptr:jacb199914 is not listed on IDEAS
    13. Callan, Tim & Nolan, Brian & Walsh, John R., 1998. "Income Tax and Social Welfare Policies," Papers BP1999/2, Economic and Social Research Institute (ESRI).

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