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What do deficits tell us about debt? : Empirical evidence on creative accounting with fiscal rules in the EU

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Author Info
von Hagen, Jürgen
Wolff, Guntram B.

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Abstract

Fiscal rules, such as the excessive deficit procedure and the stability and growth pact (SGP), aim at constraining government behavior. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this creative accounting depends on the reputation cost for the government and the economic cost of sticking to the rule. In this paper, we provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. This tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large. --

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,38.

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Date of creation: 2004
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Handle: RePEc:zbw:bubdp1:2916

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Related research
Keywords: Fiscal rules; stock-flow adjustments; debt-deficit adjustments; stability and growth pact; excessive deficit procedure; ESA 95;

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Find related papers by JEL classification:
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

References listed on IDEAS
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  1. Dafflon, Bernard & Rossi, Sergio, 1999. " Public Accounting Fudges towards EMU: A First Empirical Survey and Some Public Choice Considerations," Public Choice, Springer, vol. 101(1-2), pages 59-84, October. [Downloadable!] (restricted)
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. Kenji Moriyama & Gian Maria Milesi-Ferretti, 2004. "Fiscal Adjustment in EU Countries: A Balance Sheet Approach," IMF Working Papers 04/143, International Monetary Fund. [Downloadable!]
    Other versions:
  4. Kiewiet, D Roderick & Szakaly, Kristin, 1996. "Constitutional Limitations on Borrowing: An Analysis of State Bonded Indebtedness," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 62-97, April.
  5. Blejer, Mario I & Cheasty, Adrienne, 1991. "The Measurement of Fiscal Deficits: Analytical and Methodological Issues," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1644-78, December. [Downloadable!] (restricted)
  6. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
  7. Jürgen von Hagen, 2002. "Fiscal Rules, Fiscal Institutions, and Fiscal Performance," The Economic and Social Review, Economic and Social Studies, vol. 33(3), pages 263-284. [Downloadable!]
  8. Jürgen von Hagen & Ian Harden, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
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  9. Henning Bohn & Robert P. Inman, 1996. "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States," NBER Working Papers 5533, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August. [Downloadable!] (restricted)
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  11. Milesi-Ferretti, Gian Maria, 2001. "Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting," CEPR Discussion Papers 2663, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Fabrizio Balassone & Daniele Franco & Stefania Zotteri, 2006. "EMU fiscal indicators: a misleading compass?," Empirica, Springer, vol. 33(2), pages 63-87, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leopold Diebalek & Walpurga Koehler-Toeglhofer & Doris Prammer, 2006. "Reform of the Stability and Growth Pact," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 78-109, May 2006. [Downloadable!]
  2. Roel M.W.J. Beetsma & Frederick van der Ploeg, 2007. "Partisan Public Investment and Debt: The Case for Fiscal Restrictions," Economics Working Papers ECO2007/37, European University Institute. [Downloadable!]
  3. Buti, Marco & Eijffinger, Sylvester & Franco, Daniele, 2005. "The stability pact pains : a forward-looking assessment of the reform debate," Discussion Paper 101, Tilburg University, Center for Economic Research. [Downloadable!]
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  4. Fabio Canova & Evi Pappa, 2005. "The elusive costs and the immaterial gains of fiscal constraints," Working Papers 295, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  5. Bruno S. Frey & Benno Torgler, 2009. "Politicians: Be Killed or Survive," School of Economics and Finance Discussion Papers and Working Papers Series 242, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
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  6. António Afonso, 2005. "Ricardian Fiscal Regimes in the European Union," Working Papers 2005/18, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
    Other versions:
  7. Peter Wierts, 2007. "The sustainability of euro area debt: a re-assessment," DNB Working Papers 134, Netherlands Central Bank, Research Department. [Downloadable!]
  8. Buti, Marco & Martins, Joao Nogueira & Turrini, Alessandro Antonio, 2006. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CEPR Discussion Papers 5809, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Beetsma, Roel & van der Ploeg, Frederick, 2007. "The Political Economy of Public Investment," CEPR Discussion Papers 6090, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Roel M. W. J. Beetsma & Xavier Debrun, 2005. "Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility," IMF Working Papers 05/59, International Monetary Fund. [Downloadable!]
    Other versions:
  11. Beetsma, Roel & Giuliodori, Massimo & Wierts, Peter, 2009. "Budgeting versus implementing fiscal policy in the EU," CEPR Discussion Papers 7285, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Bernoth, Kerstin & Wolff, Guntram B., 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,19, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  13. Anthony Annett, 2006. "Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework," IMF Working Papers 06/116, International Monetary Fund. [Downloadable!]
  14. Silika Prohl & Friedrich G. Schneider, 2006. "Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries," Economics working papers 2006-10, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
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