Common Fluctuations in OECD Budget Balances
We analyze comovements in four measures of budget surpluses for 18 OECD countries for 1980–2008 with a dynamic latent factor model. The world factor in national budget surpluses declines substantially in the 1980s, rises throughout much of the 1990s to a peak in 2000, before declining again in the most recent period. This world factor explains a substantial portion of the variability in budget surpluses across countries. World factors in national output gaps, dividend-price ratios, and military spending significantly explain variation in the world budget surplus factor. The significant relationship between national output gaps and OECD measures of cyclically adjusted budget surpluses suggests that such cyclical measures inadequately adjust for the international business cycle. Sizable fluctuations in idiosyncratic components of national budget surpluses often readily relate to well known “unusual” country circumstances.