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Over-optimistic official forecasts and fiscal rules in the eurozone
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...
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| Published in: | Review of world economics 2013-06, Vol.149 (2), p.247-272 |
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| Main Authors: | , |
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| Language: | English |
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| cites | cdi_FETCH-LOGICAL-c534t-ac721ffc0dd84a9e0de512c91b08be2c04da1ad880978db8ee56b295b26ff4313 |
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| container_title | Review of world economics |
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| creator | Frankel, Jeffrey Schreger, Jesse |
| description | 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. |
| doi_str_mv | 10.1007/s10290-013-0150-9 |
| format | article |
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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? 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deficit</subject><subject>Financial institutions</subject><subject>Fiscal policy</subject><subject>Forecasts</subject><subject>GDP</subject><subject>Global economy</subject><subject>Government</subject><subject>Government budgets</subject><subject>Gross Domestic Product</subject><subject>Institutions</subject><subject>International Economics</subject><subject>Law</subject><subject>Literature reviews</subject><subject>Maastricht Treaty</subject><subject>Macroeconomics/Monetary Economics//Financial Economics</subject><subject>Optimism</subject><subject>Original Paper</subject><subject>Output gaps</subject><subject>Regulation</subject><subject>Reproductive health</subject><subject>Statistical forecasts</subject><subject>Studies</subject><subject>Tax rates</subject><subject>Taxation</subject><subject>Time series 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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.</abstract><cop>Berlin/Heidelberg</cop><pub>Springer</pub><doi>10.1007/s10290-013-0150-9</doi><tpages>26</tpages></addata></record> |
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| ispartof | Review of world economics, 2013-06, Vol.149 (2), p.247-272 |
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| subjects | Balanced budgets Bias Births Budget deficit Budget deficits Budgeting Budgets Constitutions Countries Decision-making Economic development Economic growth Economic Policy Economic stability Economic statistics Economic theory Economics Economics and Finance Euro Euro Zone Eurocurrency market Europe European Integration Eurozone Federal budget deficit Financial institutions Fiscal policy Forecasts GDP Global economy Government Government budgets Gross Domestic Product Institutions International Economics Law Literature reviews Maastricht Treaty Macroeconomics/Monetary Economics//Financial Economics Optimism Original Paper Output gaps Regulation Reproductive health Statistical forecasts Studies Tax rates Taxation Time series forecasting |
| title | Over-optimistic official forecasts and fiscal rules in the eurozone |
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