What Do Deficits Tell us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU

Juergen von Hagen () and Guntram Wolff

No 4759, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Fiscal rules, such as the excessive deficit procedure and the stability and growth pact (SGP), aim at constraining government behaviour. 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.

Keywords: debt-deficit adjustments; ESA 95; excessive deficit procedures; fiscal rules; stability and growth pact; stock-flow adjustments (search for similar items in EconPapers)
JEL-codes: E62 H61 H62 H63 H70 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
Date: Written
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Related works:
Working Paper: What do deficits tell us about debt?: Empirical evidence on creative accounting with fiscal rules in the EU (2004)
Working Paper: What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU (2006)
Journal Article: What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU (2006)
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