Revenue Elasticities in Euro Area Countries
30 Pages Posted: 3 Feb 2017
Date Written: January 20, 2017
Revenue elasticities play a key role in forecasting, monitoring and analysing public finances under the European fiscal framework, which largely builds on cyclically adjusted indicators. This paper investigates whether there is evidence for dynamic – instead of the currently used static – elasticities in euro area countries. Applying country-specific error correction models we reveal important differences across countries. For a majority of euro area Member States we find evidence for dynamic revenue elasticities. We show that the application of such dynamic elasticities could substantially reduce forecast errors in several countries – with the evidence being stronger based on ex-post than based on real-time data.
Keywords: EU fiscal surveillance, revenue elasticities, error correction models, tax forecasts, real-time data
JEL Classification: E62, H68
Suggested Citation: Suggested Citation