Posted

May 20, 2015 04:36:44 AM

Date

2015-05

Author

Estelle X. Liu, Todd Mattina, and Tigran Poghosyan

Affiliation

Fiscal Affairs Department, IMF

Title

Correcting “Beyond the Cycle:” Accounting for Asset Prices in Structural Fiscal Balances

Summary /
Abstract

This paper outlines an operational approach for incorporating the impact of asset price cycles in the calculation of structural fiscal balances (SFBs). The global financial crisis demonstrated that movements in asset prices can have an important fiscal impact. Failing to account for the fiscal impact of asset price cycles can encourage a pro-cyclical policy stance if temporarily high revenues are passed through into expenditures. In addition, over-estimating the SFB may lead to inadequate fiscal buffers when cyclical revenues eventually dissipate. The paper proposes an empirical approach to correct for asset prices and provides illustrative country results for selected OECD countries. We find that asset price cycles are imperfectly synchronized with the business cycle and are quantitatively significant with an average pre-crisis fiscal impact ranging from about ½ to 2 percent of GDP in the sample. For a number of countries, the pre-crisis fiscal impact of high asset prices was larger at about 4 percent of GDP.

Keywords

Structural fiscal balance, financial crisis, asset price, equity market, housing market, panel data econometrics

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15109.pdf

See

More articles ...