2/2009 Andrew Hughes Hallett, Rasmus Kattai and John Lewis. Can we rely on real time figures for cyclically adjusted budget balances?

Working Papers of Eesti Pank. No. 2/2009. Andrew Hughes Hallett1, Rasmus Kattai2 and John Lewis3

This paper analyses the reliability of real time estimates of cyclically adjust budget balances (CABs). We find that real time CABs are not better at forecasting the ex post figures than simpler benchmarks. Further, we find that real time CABs have low power in detecting fiscal slippages, and in correctly identifying fiscal improvements. Around half of the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages. That means it will be difficult to use them to reliably monitor the health of public finances. Lastly, 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 Code: H62, H87
Key words: real time data, cylically adjusted budget deficits, measurement error

* The authors are grateful to the DNB's visiting scholar programme for enabling Rasmus Kattai to visit the DNB to work on this paper. This paper would not have been possible without the painstaking work of others in compiling the real time dataset. We thank Massimo Giuliodori for allowing us to use the dataset he assembled, and Peter Keus of De Nederlandsche Bank for his work in collating additional data. We thank 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 at the Nederlandsche Bank for useful comments.
1 George Mason University, School of Public Policy, 4400 University Drive, Fairfax, VA 22030, US.
2 Research Department, Bank of Estonia, Estonia Pst 15, 15095, Tallinn, Estonia.
3 Economics and Research Division, De Nederlandsche Bank, Postbus 98, 1000AB, Amsterdam, The Netherlands.

Authors' e-mail addresses: ahughes [at] gmu.edu, rkattai [at] epbe.ee and j.m.lewis [at] dnb.nl

The views expressed are those of the authors and do not necessarily represent the official views of De Nederlandsche Bank or Eesti Pank.

Contents

Appendix 1. Revisions in gap estimates: Root Mean Squared Error (own gap estimates are compared to OECD's ex post data)
Appendix 2. Revisions in gap estimates: Root Mean Squared Error (own gap estimates are compared to own ex post data)
Appendix 3. Revisions in CAB estimates: Root Mean Squared Error (own CAB estimates are compared to OECD's ex post data)
Appendix 4. Revisions in CAB estimates: Root Mean Squared Error (own CAB estimates are compared to own ex post data)
1. Introduction
2. How well do the real time figures perform against a simple benchmark?
3. The Effectiveness of CABs as an Early Warning Indicator
4. Data Revisions and Fiscal Slippages: Is there a link?
5. Concluding Remarks
6. References
Appendices

Can We Rely on Real Time Figures for Cyclically Adjusted Budget Balances?, Working Papers of Eesti Pank No 2/2009 (PDF*)

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