The name is absent

Discussion

Gyorgy Kopits*

The chapter by Barrell, Hurst and Mitchell constitutes an excellent analytical exercise. It
was a pleasure to read it. The chapter is a rigorous attempt at gauging the degree of
uncertainty associated with the measurement of the cyclically adjusted budget (CAB)
balance (and of the underlying output gap) in major EU member economies. Apart from
the solution of analytical and computational challenges, my interest in this work is
primarily from the standpoint of the policy maker.

When reading the chapter I was reminded of the book by former U.S. Treasury Secretary
Rubin (2003) about his approach to decision-making during his years in government and
in investment banking. The essential point was that he took policy decisions or business
decisions always with a view to assessing and weighing in real time the uncertainties
surrounding those decisions - without the benefit of any formal gauge. In particular, the
conduct of fiscal policy for stabilization purposes presupposes real-time estimates of the
output gap. At the supranational EU level, output gap estimates are necessary for
surveillance to ascertain whether a member country’s underlying fiscal position is in line
with the requirements of the Stability and Growth Pact. Beyond the realm of fiscal policy,
reliable output gap estimates are also a key ingredient in the formulation of monetary
policy, not only by central banks that follow a Taylor rule, but even by those that target
inflation alone. Yet the reliability of such estimates is viewed with widespread scepticism
- as expressed for example recently by Rogoff (2006, p. 320). Therefore, in this broad
context, the experiment reported in this chapter is most welcome from the perspective of
multiple users.

The chapter contributes to a clearer understanding of the cyclically adjusted budgetary
position in real time. It makes a quantitative assessment of the uncertainty surrounding
point estimates of the output gaps, by comparing real-time estimates with full-sample
measures of the gap. It applies a model-based approach, drawing on unobserved
components. The resulting output gap measures and the respective uncertainty bands are
then translated into CAB measures on the basis of stylized budgetary sensitivity
parameters. By this measure, the authors find that in Italy, France, Germany and to a
lesser extent UK, the general government accounts have not been close to balance or in
surplus position in recent years. On the other hand, for Spain, the Netherlands and
Belgium fiscal balance is obtained. These results can be examined on the basis of four
criteria: robustness, sensitivity, versatility, and usefulness.

The views expressed in this chapter are those of the author and are not attributable to the National
Bank of Hungary.

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