How Reliable are Cyclically Adjusted Budget Balances in Real Time?

18 Pages Posted: 6 Jan 2012

See all articles by Andrew J. Hughes Hallett

Andrew J. Hughes Hallett

George Mason University - School of Policy, Government, and International Affairs

Rasmus Kattai

affiliation not provided to SSRN

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies

Date Written: January 1, 2012

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.

Suggested Citation

Hughes Hallett, Andrew and Kattai, Rasmus and Lewis, John, How Reliable are Cyclically Adjusted Budget Balances in Real Time? (January 1, 2012). Contemporary Economic Policy, Vol. 30, Issue 1, pp. 75-92, 2012, Available at SSRN: https://ssrn.com/abstract=1980530 or http://dx.doi.org/10.1111/j.1465-7287.2011.00250.x

Andrew Hughes Hallett

George Mason University - School of Policy, Government, and International Affairs ( email )

Founders Hall
3351 Fairfax Dr.
Arlington, VA 22201
United States

Rasmus Kattai

affiliation not provided to SSRN ( email )

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies ( email )

Amsterdam
Netherlands

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