The name is absent

By taking the cyclically adjusted (primary) budget balance bs_t = b_t - ba_t as calculated by
the European Commission as dependent variables,⁵⁷ we refrain from estimating the
cyclical component, which is thus ba_t = α_t ■ It = α ■ GAP_t .

If, however, the discretionary policy response component and the automatic stabiliser
component respond to the same cyclical indicator I^c , general equation (4.3.1) is reduced
to

b_t =μ_t +(α+γ)_t ■I_t^c +ε_t ,                                                          (4.5.1)

state equation (4.3.2) and

(α+γ)t+1 =(α+γ)t+ξt+1 .            ζt ~iid N(0,σζ)                      (4.5.2)

Whereas the actual budget balance is expressed as a ratio of nominal GDP, the core
balance and the cyclically adjusted balances are expressed as ratios of nominal potential
GDP (since cyclically adjusted balances should be interpreted as values of the deficits
(surpluses) that would be observed if output were at some reference potential level).
However, one should be aware of the fact that policy-makers, the public and international
institutions such as the EC generally monitor the development of public finances relative
to nominal GDP. Actual and cyclically adjusted budget balance figures as well as revenue
and expenditure figures are taken from the AMECO database.

The indicator I_t^a is always specified as the output gap. However, at the current stage of
our research, the indicator I_t^d is specified as the output gap on the one hand and split up
into I_t^d+ and I_t^d- on the other hand in order to capture upturns and downturns.⁵⁸

4.4 Results

Estimating the impact of the discretionary policy response to the cycle only (equation
4.4), i.e. taking the cyclically adjusted total balance in % of potential GDP as dependent
variable and the output gap as explanatory variable, gives a negative parameter value for
γ of a size of about -0.35 (see Figure 4.1, Figure 4.2 and Table 4.1). A negative value of
this coefficient reveals a pro-cyclical impact of discretionary policy responses on cyclical
developments.

The cyclically adjusted budget balance has been corrected for an estimated output gap
(compositional effects are not taken into account), i.e. the budget balance figures are adjusted for a)
the difference between actual output and estimated potential output (the output gap) and b) the
difference between the actual unemployment rate and the estimated equilibrium unemployment rate
(the unemployment gap).

We intend to broaden the analysis to include the period t-1 expected real GDP growth rate of period t
on which the respective budget draft in Austria is based. This projection is part of the regular
economic outlook of the Austrian Institute of Economic Research (WIFO). Even though growth does
not represent an adequate proxy for cyclical conditions one has to bear in mind that politicians may
just look at growth rates when taking discretionary decisions. Using real-time growth data moves the
focus on the intentions fiscal policy makers had, when deciding discretionary measures, whereas the
use of ex post output gap allows the assessment of the actual (or ex post) counter-/pro-cyclicality of
fiscal policies (Forni and Momigliano (2004)).

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