Structural Balance Targeting and Output Gap Uncertainty

32 Pages Posted: 18 Jul 2014

See all articles by Eugen Tereanu

Eugen Tereanu

European Central Bank (ECB)

Anita Tuladhar

International Monetary Fund (IMF) - European Department

Alejandro S. Simone

International Monetary Fund (IMF)

Date Written: June 2014

Abstract

Potential output estimation plays a crucial role in conducting fiscal policy based on structural balances. Difficulties in estimating potential output could lead to an erroneous policy stance with a consequent impact on growth. This paper analyzes historical data on revisions ofactual and potential growth in the European Union and the implication of these revisions for the measurement of fiscal effort using the cyclically-adjusted primary balance (CAPB). It finds that revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average. Revisions in potential GDP also contributed significantly to revisions in the estimated CAPB, especially during the crisis years. Given these findings and historical correlations, it proposes an indicative rule of thumb for reducing errors in the measurement of fiscal effort by factoring in that about 30 percent of revisions in actual growth capturechanges in potential growth. In other words, the standard advice of “letting automatic stabilizers operate fully” in response to a positive/negative growth shocks likely implies a strengthening/weakening of the structural position.

Keywords: Structural fiscal balance, European Economic and Monetary Union, Fiscal policy, Economic growth, structural balance, cyclically adjusted balance, budget year, budget preparation, fiscal effort, structural fiscal, fiscal position, government spending, fiscal variables, budget execution, budget balances, primary expenditure, public finances, budget implementation, budget execution data, fiscal stance, fiscal adjustment, fiscal balances, taxation, fiscal improvements, fiscal policy objectives, budget planning, fiscal targets, fiscal rules, public expenditures, fiscal costs, fiscal balance

JEL Classification: E62, H60

Suggested Citation

Tereanu, Eugen and Tuladhar, Anita and Simone, Alejandro S., Structural Balance Targeting and Output Gap Uncertainty (June 2014). IMF Working Paper No. 14/107, Available at SSRN: https://ssrn.com/abstract=2468012

Eugen Tereanu (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anita Tuladhar

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Alejandro S. Simone

International Monetary Fund (IMF) ( email )

700 19th Street, NW
Washington, DC 20431
United States

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