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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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Bibliographic Info

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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Publication status: published as Jeffrey Frankel, 2011. "Over-optimism in forecasts by official budget agencies and its implications," Oxford Review of Economic Policy, Oxford University Press, vol. 27(4), pages 536-562.
Handle: RePEc:nbr:nberwo:17239

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Cet inébranlable optimisme des prévisions de croissance
    by ? in D'un champ l'autre on 2014-07-08 17:00:00
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Cited by:
  1. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  2. Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2012. "On Graduation from Fiscal Procyclicality," Working Paper Series rwp12-011, Harvard University, John F. Kennedy School of Government.
  3. Frankel, Jeffrey A. & Schreger, Jesse M, 2013. "Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone," Scholarly Articles 9804488, Harvard Kennedy School of Government.
  4. Merola, Rossana & Pérez, Javier J., 2013. "Fiscal forecast errors: Governments versus independent agencies?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 285-299.
  5. Frankel, Jeffrey A., 2012. "What Small Countries Can Teach the World," Scholarly Articles 8694935, Harvard Kennedy School of Government.
  6. 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.
  7. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: How Much, How Fast and by What Means?," OECD Economic Policy Papers 1, OECD Publishing.
  8. William Easterly, 2012. "The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 151-173 National Bureau of Economic Research, Inc.
  9. 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.
  10. Simon Luechinger & Christoph Schaltegger, 2013. "Fiscal rules, budget deficits and budget projections," International Tax and Public Finance, Springer, vol. 20(5), pages 785-807, October.
  11. Giang Ho & Paolo Mauro, 2014. "Growth: Now and Forever?," IMF Working Papers 14/117, International Monetary Fund.
  12. World Bank, 2013. "World Development Report 2014," World Bank Publications, The World Bank, number 16092, October.
  13. 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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