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Common Fluctuations in OECD Budget Balances

We use a dynamic latent factor model to analyze comovements in OECD budget surpluses. The world factor underlying common fluctuations in budget surpluses across countries explains an average of 28 to 44 percent of the variation in individual country surpluses. The world factor, which can be interpreted as a global budget surplus index, declines substantially in the 1980s, rises throughout much of the 1990s to a peak in 2000, before declining again after the financial crisis of 2008. We then estimate similar world factors in national output gaps, dividend-price ratios, and military spending that significantly explain variation in the world budget surplus factors. Idiosyncratic components of national budget surpluses correlate with well known “unusual” country circumstances, such as the Swedish banking crisis of the early 1990s.

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