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The cyclically-adjusted budget balance used in the EU fiscal framework: an update

Author(s): Gilles Mourre, George-Marian Isbasoiu, Dario Paternoster and Matteo Salto

The cyclically-adjusted budget balance used in the EU fiscal framework: an updatepdf(2 MB) Choose translations of the previous link 

Summary for non-specialistspdf(41 kB) Choose translations of the previous link 

The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance, both in its preventive and corrective arms. The concept corresponds to the budget balance prevailing if the economy was running at potential. After correcting for the one-off and temporary measures, it is called structural budget balance and used to assess the fiscal policy stance. The importance of the CAB has been restated forcefully with the recent reform of the European economic governance. This paper aims at methodologically improving the CAB to better measure the reaction of the balance-to-GDP ratio to cyclical conditions. This was achieved by using a more precise concept of the cyclical-adjustment parameter and by updating the decade-old fiscal elasticities underlying the computation of the CAB. This paper reviews and explains in detail these recent improvements and describes the impact thereof on the CAB results.

(European Economy. Economic Papers 478. March 2013. Brussels. PDF. 35pp. Tab. Graph. Ann. Free.)

KC-AI-13-478-EN-N (online)
ISBN 978-92-79-28560-8 (online)
doi: 10.2765/3922 (online)

JEL classification: E32, E61, H3, H6

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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