{
  "title": "Structural Balance Targeting and Output Gap Uncertainty",
  "publication": "IMF Working Papers, June 13, 2014",
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  "summary": "Potential output estimation plays a crucial role in conducting fiscal policy based on structural balances. Difficulties in estimating potential output could lead to an erroneous policy stance with a consequent impact on growth.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- 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.\n- 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).\n- Revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average.\n- Revisions in potential GDP contributed significantly to revisions in the estimated CAPB, especially during the crisis years."
    },
    {
      "heading": "Historical correlations and methodological insight",
      "content": "- 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.\n- 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."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- When implementing structural-balance-based fiscal policy, explicitly account for output-gap and potential-output uncertainty to reduce mismeasurement of fiscal effort.\n- 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)."
    },
    {
      "heading": "Scope, subjects, and keywords",
      "content": "- Scope: European Union historical revisions of actual and potential growth; implications for cyclically-adjusted primary balance measurement.\n- Subjects: Budget planning and preparation; Fiscal policy; Fiscal stance; Output gap; Potential output; Production growth; Public financial management (PFM).\n- 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.\n\nSource: \"Structural Balance Targeting and Output Gap Uncertainty\", Eugen Tereanu, Anita Tuladhar, Alejandro Simone, June 13, 2014.\n\n---\n\n Content in this bundle\n\n- wp14107\n  - wp14107 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp14107 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/structural-balance-targeting-and-output-gap-uncertainty-41650"
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    "Authors: Eugen Tereanu, Anita Tuladhar, Alejandro Simone",
    "Published: June 13, 2014",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498305167.001",
    "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.",
    "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.",
    "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: 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.",
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