Fiscal policy in real-time: Role of growth surprises

• Thesis title in Czech: Fiskální politika v reálném čase: Role revizí růstu HDP
• Thesis title in English: Fiscal policy in real-time: Role of growth surprises
• Key words: Data sbíraná v reálném čase, fiskální dohled, Pakt stability a růstu, cyklicky upravené primární saldo rozpočtu
• English key words: Real-time data, fiscal surveillance, Stability and Growth Pact, cyclically-adjusted primary balance
• Academic year of topic announcement: 2018/2019
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 31.01.2019
• Date of assignment: 31.01.2019
• Date and time of defence: 05.02.2020 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 03.01.2020
• Date of proceeded defence: 05.02.2020
• Opponents: PhDr. Michal Hlaváček, Ph.D.

Guidelines

Since the reform of Stability and Growth Pact (SGP) of 2005, cyclically adjusted budget balance has become the key element of EU fiscal surveillance framework, as it is used for both the assessment of country-specific medium-term fiscal objectives under the preventive arm of SGP and the assessment of the effective action of the excessive deficit procedure under the corrective arm of SGP. Governments therefore calculate with cyclical component while creating fiscal policy. However, the output gap identifying the cyclical component of the budget balance is often subject to numerous ex-post revisions. Hence understanding the relation between the real-time estimate of the output gap and its final figures is vital.
Few researchers have already been dealing with the problem of fiscal data revisions in European Union. For example, De Castro, Pérez and Rodrígues-Vives (2013) use panel data from EU-15 countries in years 1995 to 2008 to test whether the initial releases are rational forecasts of finally revised budget balances. Kempknes (2012) also works with EU-15 countries and tests real-time bias of data from databases of the EU, the IMF and the OECD. As we are now able to gather data from the time of financial and European debt crisis, this thesis follows the intuition of these authors, but consider also the influence of growth surprises and performance of public finances on the reliability of the estimates.

Hypotheses:

Write down 3 principal hypotheses that you would like to test in your thesis. Think hard about these; don’t include vague statements and trivial identities. Hypotheses must be testable, but you may adjust them later.
1. Hypothesis #1: Cyclically adjusted budget balance real-time estimates are unbiased estimators of revised ex-post data.
2. Hypothesis #2: Cyclically adjusted budget balance real-time estimates are systematically less reliable when growth surprises occur in the economy.
3. Hypothesis #3: Cyclically adjusted budget balance real-time estimates are systematically less reliable when public finances perform poorly.
Methodology:

For the first part of the thesis, existing literature will be synthesized to form comprehensive theoretical background on the topic and the summary of yet covered topics. The second step will be gathering the data on 28 member states of the EU from the datasets of European Commission, OECD and IMF, including the real-time estimates of output gap. This data will be used to construct a panel and test the hypotheses using regression analysis. When constructing the model, I will draw from experience of De Castro, Pérez and Rodrígues-Vives (2013) and Kempknes (2012).
Expected Contribution:

Since fiscal coordination of member states is years after European debt crisis still a vivid topic within the EU, we can expect further contemplation on the state of SGP. Understanding the mechanisms of current fiscal framework will then be crucial. The aim of this thesis is to contribute the existing literature on one of the key elements of the framework – the cyclical component of the budget balance and its revisions.
The analysis will comprise data from the whole EU-28 from different sources – the considered dataset is therefore broader than the dataset used by different authors. The second significant feature of the analysis is also the fact that it will cover the years of severe economic conditions with worse predictability of economic development. That way we can study the properties of the cyclical component estimations during the time when the right and informed choices on fiscal policy are of great importance.

References

CIMADOMO, Jacopo. Real-Time Data and Fiscal Policy Analysis: A Survey of the Literature. Journal of Economic Surveys [online]. 2016, 30(2), 302-326. ISSN 09500804.
DE CASTRO, Francisco; PÉREZ, Javier J.; RODRÍGUEZ-VIVES, Marta. Fiscal Data Revisions in Europe. Journal of Money, Credit and Banking [online]. 2013, 45(6), 1187. DOI: 10.1111/jmcb.12049. ISSN 00222879.
HALLETT, Andrew Hughes; KATTAI, Rasmus; LEWIS, John. How Reliable Are Cyclically Adjusted Budget Balances in Real Time?. Contemporary Economic Policy [online]. 2012, 30(1), 75-92 [cit. 2019-01-26]. ISSN 10743529.
KEMPKES, Gerhard. Cyclical Adjustment in Fiscal Rules: Some Evidence on Real-Time Bias for EU-15 Countries. FINANZARCHIV [online]. 2014, 70(2), 278-315. DOI: 10.1628/001522114X681388. ISSN 00152218.
LARCH, Martin; TURRINI, Alessandro. The Cyclically Adjusted Budget Balance in EU Fiscal Policymaking: Love at First Sight Turned into a Mature Relationship. Intereconomics [online]. 2010, 45(1), 48-60. DOI: http://dx.doi.org/10.1007/s10272-010-0324-9. ISSN 00205346.
LEY, Eduardo; MISCH, Florian. Real-time macro monitoring and fiscal policy. ZEW Discussion Paper [online]. 2014, 14-122.
MARCELLINO, Massimiliano; MUSSO, Alberto. The reliability of real-time estimates of the euro area output gap. Economic Modelling [online]. 2011, 28(4), 1842-1856. DOI: 10.1016/j.econmod.2011.03.014. ISSN 02649993.
MCMORROW, Kieran; ROEGER, Werner; VANDERMEULEN, Valerie, HAVIK, Karel. An assessment of the relative quality of the Output Gap estimates produced by the EU's Production Function Methodology. European Commission, Directorate-General for Economic and Financial Affairs [online]. 2015. DOI:10.2765/374342. ISBN 978-92-79-48696-8.

Preliminary scope of work

1. Úvod
2. Přehled literatury: Shrnutí dosavadního výzkumu a teoretický základ nutný pro porozumění tématu
3. Metodologie: Vysvětlení metod a modelů použitých pro testování hypotéz
4. Data: Popis vstupních dat modelů
5. Výsledky: Diskuse o výsledcích empirického výzkumu
6. Závěr: Shrnutí zjištění a jejich přesahu do fiskální politiky a pro budoucí výzkum

Preliminary scope of work in English

1. Introduction
2. Literature review: Summary of the previous research on the topic and theoretical background necessary for the understanding of the topic
3. Methodology: Explanation of models used for testing of the hypotheses
4. Data: Description of the model inputs
5. Results: Discussion of the findings resulting from the model
6. Conclusion: Summary of the findings and implications for fiscal policy and future research