The Relevance of Cyclically-Adjusted Public Balance Indicators - The French Case

Abstract

Bouthevillain and Quinet discuss the adjustment for the effects of fluctuations in the inflation rate. The paper points out the problems that arise in the measurement of these effects, especially because the impact of price changes may considerably differ according to whether they are expected or unexpected. It should also be considered that it is difficult to define and measure price fluctuations, given the existence of a continuum of possible levels of equilibrium for inflation.

The authors present, together with a method belonging to the “gap elasticity” category, an application of VARs which, following the approach developed in Blanchard and Quah, decomposes the fluctuations in the deficit-to-GDP ratio into those arising from output and those arising from the deficit itself. The cyclical component of the deficit is defined as the accumulation of output shocks over the period. The authors assign to the VAR-based-method the role of complementing the more traditional approach.