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HOW RELIABLE ARE CYCLICALLY ADJUSTED BUDGET BALANCES IN REAL TIME?

Authors

  • ANDREW HUGHES HALLETT,

    1. Hughes Hallett: George Mason University, School of Public Policy, 4400 University Drive, Fairfax, VA 22030. Phone +1 703 993 9123, Fax +1 703 993 2284, E-mail ahughesh@gmu.edu
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  • RASMUS KATTAI,

    1. Kattai: Research Department, Bank of Estonia, Estonia Pst 15, 15095 Tallinn, Estonia. E-mail rasmus.kattai@eestipank.ee
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  • JOHN LEWIS

    1. Lewis: Economics and Research Division, De Nederlandsche Bank, 1000 AB Amsterdam, The Netherlands. Phone +31 20 524 2835, Fax +31 20 524 2506, E-mail j.m.lewis@dnb.nl
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    • The authors are grateful to the DNB's visiting scholar program for enabling Rasmus Kattai to visit the DNB to work on this paper. We thank Massimo Giuliodori for allowing us to use the data set he assembled and Peter Keus of De Nederlandsche Bank for his work in collating additional data. We are grateful to two anonymous referees as well as seminar participants at the Universities of Amsterdam and Cape Town, the Estonian Economic Association, the CIRANO Workshop on Data revision, the KOF Workshop on data revision, and the Nederlandsche Bank for helpful comments. Thanks also to Simon van Norden for very useful feedback. The views expressed are those of the authors and do not necessarily represent the official views of De Nederlandsche Bank or Eesti Pank.


Abstract

Cyclically adjusted budget balances (CABs) are often used to provide an indication of the structural state of public finances. This paper analyzes the reliability of these figures in real time. In a test of the ability to forecast the “final data,” we find that real-time CABs are outperformed by a simpler methodology. Furthermore, we find that real-time CABs have low power in detecting fiscal slippages and in correctly identifying fiscal improvements. Finally, we find that CABs are systematically less reliable under conditions of poor or deteriorating public finances, which means they are at their most unreliable precisely when they are needed most. (JEL H62, H87)

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