Structural Balances and Revenue Windfalls : The Role of Asset Prices Revisited

In this paper we revisit one of the quot;missing linksquot; between budget balances and the economic cycle, namely the impact of asset prices on fiscal revenues. We estimate revenue elasticities with respect to equity and real estate price indices for 16 OECD countries, as well as for a synthetic euro area aggregate. For a sub-sample of euro area countries, we use these elasticities to investigate the impact of asset prices on budget balances and the assessment of the fiscal stance by adjusting existing estimates of cyclically adjusted balances for the asset price quot;cyclequot;. The results support the view that asset price movements are a major factor behind unexplained changes in the cyclically adjusted balance, which, if not accounted for, can lead to erroneous conclusions regarding underlying fiscal developments