Research Discussion Papers, Bank of Finland
No 1/1999:
Indicators of the Cyclically Adjusted Budget Balance: The Bank of Finland's Experience
Anne Brunila ()
, Juhana Hukkinen ()
and Mika Tujula
Abstract: Cyclically adjusted government budget balances have become
increasingly popular as a means of analysing the fiscal situation and
changes in policy that result from the intentional actions of the
government. As the actual budget balances are affected both by cyclical
factors ('automatic stabilisers') and structural ('discretionary')
measures, they may not, in general, be very useful when seeking to assess
the orientation of underlying fiscal policy and possible structural
imbalances in the budget balance. The problem however is that there is no
generally accepted method of calculating cyclically adjusted (structural)
budget balances. The results tend to be fairly noisy and sensitive to the
method of calculation. The purpose of this article is to highlight these
issues by reviewing three estimation methods used by the Bank of Finland -
GDP smoothing based on the Hodrick-Prescott trend estimation method, the
production function approach and Blanchard's method - and the corresponding
estimates of the cyclically adjusted budget balances for Finland.
Keywords: fiscal policy; cyclically adjusted budget balance; (follow links to similar papers)
32 pages, January 28, 1999
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