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

Juergen von Hagen and Guntram Wolff

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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 depends on the reputation cost for the government and the economic cost of sticking to the rule. 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. The 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.

Keywords: Fiscal rules; stock-flow adjustments; debt-deficit adjustments; stability and growth pact; excessive deficit procedure; ESA 95 (search for similar items in EconPapers)
JEL-codes: E62 H61 H62 H63 H70 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (144)

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Related works:
Journal Article: What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU (2006)
Working Paper: What Do Deficits Tell us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU (2004)
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