Measuring Structural Budget Balances in a Fast-Growing Economy : The Case of Ireland

The paper on the Irish experience by Cronin and McCoy highlights how specific features of the economy may account for large differences in the results of the two approaches – those based on a production function and those relying on statistical filters – and hinder accurate estimates of the output gaps. Both statistical filter and production function approaches are complicated by the large variability in Irish output growth and the existence of a highly-elastic labour supply and highly-mobile capital. These features of the Irish economy may explain the disparity of several percentage points that exists between the estimated potential growth rates considered applicable to Ireland at present. Such variation can, in general, weaken the use of structural budget balance as an indicator of a Member State's performance with respect to the Stability and Growth Pact. Cronin and McCoy also point out that systematic discretionary policy may result in elasticities not being constant over time, making standard estimates less reliable