Correcting “Beyond the Cycle": Accounting for Asset Prices in Structural Fiscal Balances

By Miss Estelle X Liu, Todd D. Mattina, Tigran Poghosyan

May 19, 2015

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Miss Estelle X Liu, Todd D. Mattina, and Tigran Poghosyan. Correcting “Beyond the Cycle": Accounting for Asset Prices in Structural Fiscal Balances, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper outlines an operational approach for incorporating the impact of asset price cycles in the calculation of structural fiscal balances (SFBs). The global financial crisis demonstrated that movements in asset prices can have an important fiscal impact. Failing to account for the fiscal impact of asset price cycles can encourage a pro-cyclical policy stance if temporarily high revenues are passed through into expenditures. In addition, over-estimating the SFB may lead to inadequate fiscal buffers when cyclical revenues eventually dissipate. The paper proposes an empirical approach to correct for asset prices and provides illustrative country results for selected OECD countries. We find that asset price cycles are imperfectly synchronized with the business cycle and are quantitatively significant with an average pre-crisis fiscal impact ranging from about ½ to 2 percent of GDP in the sample. For a number of countries, the pre-crisis fiscal impact of high asset prices was larger at about 4 percent of GDP.

Subject: Asset prices, Business cycles, Economic growth, Fiscal policy, Fiscal stance, Housing prices, Output gap, Prices, Production

Keywords: Asset price, Asset price cycle, Asset prices, B. measuring asset price cycle, Business cycles, Cycles result, Equity market, Equity price misalignment, Financial crisis, Fiscal stance, Global, Housing market, Housing price gap, Housing prices, Output gap, Panel data econometrics, Price cycle, Price gap, Real asset, Structural fiscal balance, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/109
Stock No:

WPIEA2015109
ISBN:

9781513520551
ISSN:

1018-5941

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