Early Warning or Just Wise after the Event? The Problem of Using Cyclically Adjusted Budget Deficits for Fiscal Surveillance

43 Pages Posted: 21 May 2008

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Rasmus Kattai

affiliation not provided to SSRN

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies

Date Written: March 2007

Abstract

The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time data set containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of the OECD's Economic Outlook. We find that data revisions are so great that real time CABs have low power in detecting fiscal slippages as defined by the ex-post data. We find that around half the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages. Our results are consistent with the conjecture that policy makers have presented favourable estimates of their fiscal position in order to reduce scrutiny or the probability of sanctions for lax behaviour.

Keywords: Cyclically Adjusted Budget Deficits, False and Missed Alarms, Potential Output, Real Time Data

JEL Classification: C82, E62, H62

Suggested Citation

Hughes Hallett, Andrew J. and Kattai, Rasmus and Lewis, John, Early Warning or Just Wise after the Event? The Problem of Using Cyclically Adjusted Budget Deficits for Fiscal Surveillance (March 2007). CEPR Discussion Paper No. DP6213, Available at SSRN: https://ssrn.com/abstract=1135455

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-322-8539 (Phone)
615-343-8495 (Fax)

Rasmus Kattai

affiliation not provided to SSRN ( email )

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies ( email )

Amsterdam
Netherlands

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