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IMF: IRELAND = Asset Boom & Structural Fiscal Position -- March 2010

IMF: IRELAND = Asset Boom & Structural Fiscal Position -- March 2010

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Asset Booms and Structural FiscalPositions: The Case of Ireland
 Daniel Kanda
WP/10/57
 
 
© 2010 International Monetary Fund WP/10/
57
 
IMF Working Paper
European Department
Asset Booms and Structural Fiscal Positions: The Case of IrelandPrepared by Daniel Kanda
1
 
Authorized for distribution by Ashoka ModyMarch 2010
Abstract
 
This Working Paper should not be reported as representing the views of the IMF.
 
The views expressed in this Working Paper are those of the author and do not necessarily represent thoseof the IMF or IMF policy. Working Papers describe research in progress by the author and are publishedto elicit comments and to further debate.
 Asset booms and sectoral changes can distort traditional estimates of structural fiscalrevenue, and could lead to serious fiscal policy errors. This paper extends the estimation of structural revenues to take account of asset prices and sectoral changes, and applies this tothe case of Ireland, where a property bust has revealed a large hole in the public finances. Itis shown that excluding these factors led to a substantial bias in the estimation of structuralrevenues, and the structural balance prior to the crisis was much larger than earlier estimated.JEL Classification Numbers: C01, C13, C51, H62, H68, E62Keywords: Structural Fiscal Balance, Asset Price Cycle, Property Bubble, IrelandAuthor 
s E-Mail Address:dkanda@imf.org 
1
The author would like to extend his sincere gratitude to Mark De Broeck, Bergljot Barkbu, and the Irishauthorities for their helpful comments. All remaining errors are the responsibility of the author.
 
2Contents PageI. Background .............................................................................................................................3
 
II. Irish Experience.....................................................................................................................4
 
A. Issues in Estimating the Irish Structural Balance......................................................5
 
III. The Model ............................................................................................................................9
 
A. Model with Stationary Data ......................................................................................9
 
B. Model with Nonstationary Data ................................................................................9
 
IV. Estimation Results .............................................................................................................10
 
V. Calculating Structural Revenues .........................................................................................15
 
VI. Structural Expenditures and Structural Balance ................................................................19
 
VII. Concluding Remarks ........................................................................................................21
 
Bibliography ............................................................................................................................22
 
Tables1.
 
 Ng Perron Unit Root Tests ...........................................................................................112.
 
Regression Estimates ...................................................................................................143.
 
Structural Fiscal Position .............................................................................................21Figures1.
 
Tax Revenue Breakdown, 1995-2007............................................................................62.
 
Comparison of Tax and Nominal GDP Growth Rates, 2003-08 ...................................73.
 
Revenue Determinants, 1987-2008 ..............................................................................124.
 
Revenue Determinants and HP Filtered Trends, 1987-2014 .......................................165.
 
Actual and Structural Revenues, 1988-2008 ...............................................................18

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