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Over-optimism in Forecasts by Official Budget Agencies and Its Implications

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  • Jeffrey A. Frankel

Abstract

The paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries. In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons. This over-optimism in official forecasts can help explain excessive budget deficits, especially the failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary. Many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP. One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17239.

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Date of creation: Jul 2011
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Handle: RePEc:nbr:nberwo:17239

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Citations

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Cited by:
  1. Frankel, Jeffrey A. & Schreger, Jesse, 2012. "Over-Optimistic Official Forecasts in the Eurozone and Fiscal Rules," Working Paper Series rwp12-041, Harvard University, John F. Kennedy School of Government.
  2. António Afonso & Ana Sofia Nunes, 2013. "Economic forecasts and sovereign yields," Working Papers 2013/02, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  3. Jeffrey A. Frankel & Carlos A. Végh & Guillermo Vuletin, 2011. "On Graduation from Fiscal Procyclicality," NBER Working Papers 17619, National Bureau of Economic Research, Inc.
  4. Ley, Eduardo & Misch, Florian, 2013. "Real-time macro monitoring and fiscal policy," Policy Research Working Paper Series 6303, The World Bank.

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