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Fiscal forecast errors: governments vs independent agencies?

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  • Rossana Merola

    (OECD)

  • Javier J. Pérez

    ()
    (Banco de España)

Abstract

The fact that the literature tends to find optimistic biases in national fiscal projections has led to a growing recognition in the academic and policy arenas of the need for independent forecasts in the fiscal domain, prepared by independent agencies, such as the European Commission in the case of Europe. Against this background the aim of this paper is to test: (i) whether the forecasting performance of governments is indeed worse than that of international organizations, and (ii) whether fiscal projections prepared by international organizations are free from political economy distortions. The answer to these both questions is no: our results, based on real-time data for 15 European countries over the period 1999-2007, point to the rejection of the two hypotheses under scrutiny. We motivate the empirical analysis on the basis of a model in which an independent agency tries to minimize the distance to the government forecast. Starting from the assumption that the government’s information set includes private information not available to outside forecasters, we show how such a framework can help in understanding the observed empirical evidence

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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1233.

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Length: 38 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:bde:wpaper:1233

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Keywords: forecast errors; fi scal policies; fi scal forecasting; political economy;

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Cited by:
  1. Athanasios Petralias & Sotirios Petros & Prodromos Prodromidis, 2014. "Greece in Recession: Economic predictions, mispredictions, forecast suggestions and policy recommendations," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 7(2), pages 53-80, December.
  2. António Afonso & Ana Sofia Nunes, 2013. "Economic forecasts and sovereign yields," Working Papers Department of Economics 2013/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Athanassios Petralias & Sotirios Petros & Pródromos Prodromídis, 2013. "Greece in recession: economic predictions, mispredictions and policy implications," LSE Research Online Documents on Economics 52626, London School of Economics and Political Science, LSE Library.
  4. António Afonso & Jorge Silva, 2012. "The Fiscal Forecasting Track Record of the European Commission and Portugal," Working Papers Department of Economics 2012/37, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Diego J. Pedregal & Javier J. Pérez & A. Jesús Sánchez-Fuentes, 2014. "A toolkit to strengthen government budget surveillance," Banco de Espa�a Working Papers 1416, Banco de Espa�a.

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