Simple Methods to Measure the Automatic Responsiveness of the Federal Budget to Inflation 1

Abstract

Measuring the automatic responsiveness of the Federal budget to inflation is an important element of budget analysis and policy planning. This paper presents simple methods to estimate the automatic effects of inflation on Federal receipts and expenditures. The first section reviews some of the ways the budget automatically responds to inflation and briefly describes a relatively large structural model designed to measure that responsiveness. The second section presents several stochastic equations that approximate the results from the structural model. The final section uses the results from the stochastic equations to produce two equations—one for receipts and one for expenditures—that can be used to estimate inflation-induced changes in the budget. A comparison of the results from the two equations with those from the structural model suggests that the two equations capture almost all of the variation in the estimates from the larger model.