- The cyclically adjusted budget balance (CAB) has taken center stage as a policy decision tool in the recently agreed fiscal compact, which aims at enhancing fiscal surveillance among euro area members.
- A major merit of the CABs is that they provide a more accurate picture of a country’s underlying fiscal stance, independent of business cycle variations. However, real time data, available at the time of decision making, may differ from the revised figures, raising concerns about their accuracy.
- We find evidence that substantial revisions of real time CAB data limit their reliability in measuring both the level and the change of a country’s budget balance, underestimating both fiscal slippages and fiscal consolidations.
- The limited reliability of real time CABs raises enforcement risks of the fiscal compact, challenging its effectiveness to lead to a fiscally sounder Euro zone.
The European fiscal compact will be hard to implement
Economy & Markets
02 February 2012
See also
