Common Fluctuations in OECD Budget Balances

Federal Reserve Board of St. Louis Working Paper No. 2009-055A

31 Pages Posted: 26 Oct 2009

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

David E. Rapach

Seattle University, Albers School of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 26, 2009

Abstract

We analyze comovements in four measures of budget surpluses for 18 OECD countries for 1980–2008 with a dynamic latent factor model. The world factor in national budget surpluses declines substantially in the 1980s, rises throughout much of the 1990s to a peak in 2000, before declining again in the most recent period. This world factor explains a substantial portion of the variability in budget surpluses across countries. World factors in national output gaps, dividend-price ratios, and military spending significantly explain variation in the world budget surplus factor. The significant relationship between national output gaps and OECD measures of cyclically adjusted budget surpluses suggests that such cyclical measures inadequately adjust for the international business cycle. Sizable fluctuations in idiosyncratic components of national budget surpluses often readily relate to well known “unusual” country circumstances.

Keywords: Net lending, Primary balance, Dynamic latent factor model, Business cycle, Equity valuation ratio, Military spending

JEL Classification: C32, E62, F42, H62

Suggested Citation

Neely, Christopher J. and Rapach, David E., Common Fluctuations in OECD Budget Balances (October 26, 2009). Federal Reserve Board of St. Louis Working Paper No. 2009-055A, Available at SSRN: https://ssrn.com/abstract=1494427 or http://dx.doi.org/10.2139/ssrn.1494427

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

David E. Rapach

Seattle University, Albers School of Business and Economics ( email )

900 Broadway
Seattle, WA 98122
United States
206-296-5705 (Phone)

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