1. ¹Economics Department, Magyar Nemzeti Bank, H-1850, Szabadság tér 8/9, Budapest, Hungary. E-mail: vadasg@mnb.hu
2. ²Department of Economics, Central European University, H-1051, Nador 9, Budapest, Hungary

Abstract

The assessment of the direction of fiscal policy is both important and controversial. Because budgets are influenced by business cycles, disentangling the underlying fiscal position from the effect of the business cycle is difficult. The two main methods used by international institutions to determine this cyclical factor arguably do not fulfill the necessary requirements for obtaining correct results. This paper introduces an alternative disaggregated methodology which is not only able to incorporate theoretical considerations, but is also easily computable. To provide an empirical underpinning, we apply these methodologies to several countries.