Correcting “Beyond the Cycle": Accounting for Asset Prices in Structural Fiscal Balances
IMF Working Papers, May 19, 2015
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- Correcting “Beyond the Cycle": Accounting for Asset Prices in Structural Fiscal Balances
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Bibliographic details
- Authors: Miss Estelle X Liu, Todd D. Mattina, Tigran Poghosyan
- Published: May 19, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513520551.001
Summary
- Outlines an operational approach for incorporating the impact of asset price cycles in the calculation of structural fiscal balances (SFBs).
- Motivating observation: Movements in asset prices can have an important fiscal impact, as highlighted by the global financial crisis.
- Core risk: Failing to account for asset price cycles can encourage a pro-cyclical policy stance if temporarily high revenues are passed through into expenditures and can lead to inadequate fiscal buffers when cyclical revenues dissipate.
- The paper proposes an empirical correction for asset prices and provides illustrative country results for selected OECD countries.
Key findings
- Asset price cycles are imperfectly synchronized with the business cycle.
- Asset price cycles are quantitatively significant in the sample.
- The average pre-crisis fiscal impact of asset price cycles ranges from about ½ to 2 percent of GDP.
- For a number of countries, the pre-crisis fiscal impact of high asset prices was larger at about 4 percent of GDP.
Methodological approach
- Proposes an empirical approach to correct structural fiscal balances for the effects of asset price cycles.
- Provides illustrative country-level results for selected OECD countries (empirical implementation and country illustrations described in the paper).
Policy implications and recommendations
- Incorporate asset price cycle adjustments into SFB calculations to avoid overstating structural fiscal positions.
- Avoid passing temporary, asset-price-driven revenue gains directly into permanent spending commitments to reduce pro-cyclicality.
- Build adequate fiscal buffers recognizing that cyclical asset-price-related revenues can dissipate, exposing budgets to downside risks.
Illustrative results and scope
- Country illustrations show materially significant pre-crisis impacts of asset price cycles on fiscal balances.
- Quantitative impacts reported include ranges and peak country-level values (see findings: ½ to 2 percent of GDP on average; up to about 4 percent of GDP for several countries).
Authors: Estelle X Liu, Todd D. Mattina, Tigran Poghosyan; May 19, 2015 — Correcting “Beyond the Cycle": Accounting for Asset Prices in Structural Fiscal Balances (IMF Working Paper No. 2015/109).