Computing Cyclically-Adjusted Balances and Automatic Stabilizers

Abstract

This technical note provides guidance on how to decompose overall fiscal balances into cyclical and cyclically adjusted components, and how to interpret automatic fiscal stabilizers. These indicators are commonly used to assess how fiscal policy responds to macroeconomic conditions.1 Various approaches to cyclical adjustment and estimation of the automatic stabilizers are possible—this note focuses on the approach used by the IMF’s Fiscal Affairs Department (FAD) in the paper on the State of Public Finances (IMF, 2009a) and in the Fiscal Monitor (Horton et al. 2009). A key issue is the choice of scaling variable—nominal GDP or potential GDP. While results differ modestly under general conditions, care is needed in computing and interpreting these indicators, especially in “less general” cases.