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Fiscal procyclicality and output forecast errors

Author

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  • Avellan, Leopoldo
  • Vuletin, Guillermo

Abstract

Government spending in the developing world has historically been procyclical. Traditional explanations for this have mostly revolved around the explicit or implicit notion that fiscal procyclicality is the deliberate result of political economy distortions and weak institutions. Because of revisions in output growth forecasts around the world since the global financial crisis, two recent explanations in the literature have gained increasing support: (i) over-optimism in output forecasts as a cause of procyclicality, and (ii) real-time data, as opposed to ex-post data, as an explanation for policymakers' intended responses to output fluctuations, which in practice tend to deliver less procyclical “intentions” than reliance on ex-post data. This study revisits the implications of output forecast errors on fiscal procyclicality in light of these two recent strands in the literature. For this study, a simple conceptual framework was developed and empirical evidence presented using output forecasts for 101 countries. The results showed that: (i) over-optimism is neither necessary nor sufficient to explain fiscal procyclicality, and (ii) there is no reason to accept the interpretation that forecast errors have “unfortunate” systematic effects on fiscal procyclicality. Traditional political economy arguments help explain how governments handle unanticipated output fluctuations.

Suggested Citation

  • Avellan, Leopoldo & Vuletin, Guillermo, 2015. "Fiscal procyclicality and output forecast errors," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 193-204.
  • Handle: RePEc:eee:jimfin:v:55:y:2015:i:c:p:193-204
    DOI: 10.1016/j.jimonfin.2015.02.008
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    References listed on IDEAS

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    Cited by:

    1. Frankel, Jeffrey, 2017. "How to Cope with Volatile Commodity Export Prices: Four Proposals," Working Paper Series rwp17-033, Harvard University, John F. Kennedy School of Government.
    2. Ronald Miranda & Leonel Muinelo-Gallo, 2018. "The behavior of social transfers over the business cycle: empirical evidence of Uruguay," Documentos de Trabajo (working papers) 18-15, Instituto de Economia - IECON.
    3. Cust,James Frederick & Mihalyi,David, 2017. "Evidence for a presource curse ? oil discoveries, elevated expectations, and growth disappointments," Policy Research Working Paper Series 8140, The World Bank.
    4. Paloviita, Maritta & Ikonen, Pasi, 2016. "How to explain errors in budget balance forecasts in euro area countries? Empirical evidence based on real-time data," Research Discussion Papers 17/2016, Bank of Finland.
    5. repec:taf:jpolrf:v:21:y:2018:i:4:p:281-300 is not listed on IDEAS
    6. Jeffrey A. Frankel & Jesse Schreger, 2016. "Bias in Official Fiscal Forecasts: Can Private Forecasts Help?," NBER Working Papers 22349, National Bureau of Economic Research, Inc.
    7. Sampawende J Tapsoba & Robert C York & Neree C.G.M. Noumon, 2016. "Can Statistical Capacity Building Help Reduce Procyclical Fiscal Policy in Developing Countries?," IMF Working Papers 16/209, International Monetary Fund.

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