Structural Balance Targeting and Output Gap Uncertainty
IMF Working Papers, June 13, 2014
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Bibliographic details
- Authors: Eugen Tereanu, Anita Tuladhar, Alejandro Simone
- Published: June 13, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498305167.001
Summary findings
- Potential output estimation is central to fiscal policy based on structural balances; errors in estimating potential output can produce an erroneous policy stance with consequent impacts on growth.
- The paper analyzes historical data on revisions of actual and potential growth in the European Union and the implication of these revisions for measuring fiscal effort using the cyclically-adjusted primary balance (CAPB).
- Revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average.
- Revisions in potential GDP contributed significantly to revisions in the estimated CAPB, especially during the crisis years.
Historical correlations and methodological insight
- Based on historical data and correlations, the authors propose an indicative rule of thumb: factor in that about 30 percent of revisions in actual growth capture changes in potential growth.
- Interpretation: The standard advice of “letting automatic stabilizers operate fully” in response to a positive/negative growth shock likely implies a strengthening/weakening of the structural position because a portion of actual growth revisions reflect changes in potential growth.
Policy implications and recommendations
- When implementing structural-balance-based fiscal policy, explicitly account for output-gap and potential-output uncertainty to reduce mismeasurement of fiscal effort.
- Apply the indicative rule of thumb (about 30 percent of actual-growth revisions reflect potential-growth changes) to adjust assessments of fiscal stance and the CAPB, especially in periods with large revisions (for example, crisis years).
Scope, subjects, and keywords
- Scope: European Union historical revisions of actual and potential growth; implications for cyclically-adjusted primary balance measurement.
- Subjects: Budget planning and preparation; Fiscal policy; Fiscal stance; Output gap; Potential output; Production growth; Public financial management (PFM).
- Keywords: Budget planning and preparation; cyclically adjusted balance; cyclically-adjusted primary balance; Europe; fiscal policy; Fiscal stance; Output gap; output gap error; output gap estimate; output gap revision; output gap uncertainty; potential GDP; Potential output; potential output gap; Production growth; structural balance; WP.
Source: "Structural Balance Targeting and Output Gap Uncertainty", Eugen Tereanu, Anita Tuladhar, Alejandro Simone, June 13, 2014.