Targeting the Structural Balance

Abstract

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Structural Fiscal Balances: Methodological, Conceptual, and Practical Alternatives

“…3 In other words, the question is whether objectives (a) to (d) listed above can be attained by the same indicator. Dos Reis, Manasse, and Panizza (2007) examined this question, concluding that it is not possible for a CAB obtained by subtracting only the effect of the business cycle to serve as a measure of fiscal discretion or of permanent policy change in the presence of stochastic trend shocks and structural breaks.…”

“…However, some authors have criticized the implication that discretionary fiscal policy is reflected only by active measures aimed at modifying public revenues or expenditures. Dos Reis, Manasse, and Panizza (2007) argue that fiscal policy also acts by omission-that is by consciously deciding not to take action; such omission, of course, is not captured by indicators that only subtract exogenous factors from the budget balance. This view is somewhat connected with the argument of Marcel et al (2001) for the Chilean case in the sense that the fiscal impact of exogenous changes in macro variables-which differ from the GDP cycle and changes in the price of copper-are small enough to be neutralized by authorities; in that case, if the government does not neutralize small budgetary changes generated by exchange rate or inflation surprises, it may be that agencies have made a conscious decision not to do so-and that that should be interpreted as discretionary policy in itself.…”