Abstract WP11-01

Holger Bonin and Concepcio Patxot. 2008. Cyclically Neutral Generational Accounting

Abstract:

The paper introduces a key methodological innovation into generational accounting. By incorporating cyclically adjusted balances into the forward-looking budget projections underlying the concept we isolate pure policy effects, which render comparisons across time and countries of the fiscal sustainability indicators obtained truly meaningful. We also show that a demographic effect and a debt effect may drive fiscal sustainability measures over time and establish a routine to control for these effects in the generational accounting framework. An empirical application for Spain illustrates that our proposed decomposition of indicators is empirically relevant. Standard generational accounting suggests that fiscal sustainability in Spain has improved substantially in preparing for the EMU. However, calculation of the pure policy effects reveals that this actually has not been the case.