The name is absent

Table 5.2

Identification in the Long- and Short-term...

Gauging the Fiscal Indicator

The structural model then permits adopting a unified approach towards
contemporaneously uncovering indicators of potential output y^* and the structural
balance d^*. Basically, total output and government expenditures and revenues can be
decomposed into the contribution of each of the structural shocks. We take the stance that
only supply shocks determine potential output y_t^* in the long term. Both fiscal shocks
and supply shocks determine structural expenditure g_t^* and revenues t_t^*.⁸⁵ Under this
assumption, one can compute the structural deficit as in (5.6):

**

d_t* = g.                                                                     (56)

y_t

This fiscal indicator d^* can be interpreted as reflecting the discretionary stance of the
fiscal authority. From the decomposition of the budget, we can then analyse whether such
changes usually occur via spending or taxation measures.

This measure cannot directly be compared to the cyclically adjusted balances provided by
the European Commission, the OECD or to those derived from some statistical filtering
method. First, the output gap we derive need not correspond to the fluctuations around a
smooth trend on some assumption on the frequency of the business cycle. The economic
shocks that drive potential output reflect changes in productivity - that may derive from a
variety of sources - and might vary over time. Our approach is best seen in the line of

Ultimately, the sustainability of fiscal policy is determined by the overall fiscal balance as well as
potential output growth. Alternatively, one may view structural fiscal policy as depending on the
decisions of fiscal policy makers only (Bruneau and De Bandt, 2003).

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