Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone

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Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone

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Title: Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone
Author: Frankel, Jeffrey A.; Schreger, Jesse M

Note: Order does not necessarily reflect citation order of authors.

Citation: Frankel, Jeffrey A., and Jesse Schreger. "Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone." Review of World Economics (published online, February 14, 2013).
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Abstract: Eurozone members are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro, members have postponed painful adjustment. Wishful thinking has played an important role in this failure. We find that governments’ forecasts are biased in the optimistic direction, especially during booms. Eurozone governments are especially over-optimistic when the budget deficit is over the 3 % of GDP ceiling at the time the forecasts are made. Those exceeding this cap systematically but falsely forecast a rapid future improvement. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But biased forecasts can defeat budget rules. What is the record in Europe with national rules? The bias is less among eurozone countries that have adopted certain rules at the national level, particularly creating an independent fiscal institution that provides independent forecasts.
Published Version: http://dx.doi.org/10.1007/s10290-013-0150-9
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:9804488
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