IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules

  • Marco Buti
  • Jo�o Nogueira Martins
  • Alessandro Turrini

Under numerical fiscal rules, such as those underpinning EMU, governments have strong temptations to use accounting tricks to meet the fiscal constraints. Given these political incentives, fiscal variables that in the past were regarded as a mere residual acquire a strategic role. This is the case of the so-called stock-flow adjustment (SFA) which reconciles deficit and debt developments. We develop a simple theoretical model where deficits and two distinct SFA components (one that could be used to reduce the deficit figures and the other to impact debt figures instead) are determined as a result of a constrained optimisation by fiscal authorities. Econometric evidence provides results consistent with the model findings. The SFA component related to the purpose to hide deficits rises with the recorded deficit, while the sales of financial assets designed to keep the debt under control rise with both debt and deficit. When deficits are in excess of the 3 percent limit, accounting gimmicks become more sensitive to the size of deficits. The SGP per se does not appear to increase the extent to which higher deficits trigger more accounting gimmicks. However, the SGP seems associated with a more intense use of accounting gimmicks irrespective of the level of deficit. Such accounting practices have greatly contributed to the loss of credibility of Economic and Monetary Union's fiscal rules. If properly implemented, the reformed Pact, which stresses durable adjustment and long-run sustainability, should help curb such perverse incentives. (JEL codes: E61, H62, H87) Copyright 2007, Oxford University Press.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1093/cesifo/ifm003
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 53 (2007)
Issue (Month): 1 (March)
Pages: 115-152

as
in new window

Handle: RePEc:oup:cesifo:v:53:y:2007:i:1:p:115-152
Contact details of provider: Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
Phone: +49 (89) 9224-0
Fax: 01865 267 985
Web page: http://cesifo.oxfordjournals.org/
Email:


More information through EDIRC

Order Information: Web: http://www.oup.co.uk/journals

References listed on IDEAS
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.:

as in new window
  1. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, vol. 44(2), pages 199-210, March.
  2. von Hagen, Jürgen & Wolff, Guntram B., 2004. "What Do Deficits Tell us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU," CEPR Discussion Papers 4759, C.E.P.R. Discussion Papers.
  3. Canova, Fabio & Pappa, Evi, 2005. "The Elusive Costs and the Immaterial Gains of Fiscal Constraints," CEPR Discussion Papers 5406, C.E.P.R. Discussion Papers.
  4. Balassone, F. & Manacelli, D., 2000. "Emu Fiscal Rules: is There a Gap?," Papers 375, Banca Italia - Servizio di Studi.
  5. Jean Pisani-Ferry, 2005. "Fiscal policy in EMU: towards a sustainability and growth pact," Working Papers 52, Bruegel.
  6. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
  7. Marco Buti & Paul Noord, 2004. "Fiscal Discretion and Elections in the Early Years of EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 737-756, November.
  8. Milesi-Ferretti, Gian Maria & Moriyama, Kenji, 2006. "Fiscal adjustment in EU countries: A balance sheet approach," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3281-3298, December.
  9. Lorenzo Forni & Sandro Momigliano, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," Temi di discussione (Economic working papers) 540, Bank of Italy, Economic Research and International Relations Area.
  10. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
  11. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
  12. 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.
  13. Marco Buti, 2006. "Will the new stability and growth pact succeed? An economic and political perspective," European Economy - Economic Papers 241, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  14. Hagen, Jürgen von, 2006. "Fiscal Rules and Fiscal Performance in the EU and Japan," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 147, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  15. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  16. Vincent Koen & Paul van den Noord, 2005. "Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting," OECD Economics Department Working Papers 417, OECD Publishing.
  17. Fabrizio Balassone & Daniele Franco & Stefania Zotteri, 2006. "EMU fiscal indicators: a misleading compass?," Empirica, Springer, vol. 33(2), pages 63-87, June.
  18. Benoiˆt Coeure´ & Jean Pisani-Ferry, 2005. "Fiscal Policy in Emu: Towards a Sustainability and Growth Pact?," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 598-617, Winter.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:oup:cesifo:v:53:y:2007:i:1:p:115-152. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.