Fiscal Forecast Errors in the Eurozone: The Influence of Independent Fiscal Institutions (IFIs) and Monetary Policy

A.nicolás Lorenti (), Rubén Mora-Ruano (), Daniel Fernández Romero () and Miguel Angoitia Grijalba ()
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A.nicolás Lorenti: Universidad Complutense de Madrid (UCM)
Rubén Mora-Ruano: Universidad Autónoma de Madrid (UAM)
Daniel Fernández Romero: Universidad Autónoma de Madrid (UAM)
Miguel Angoitia Grijalba: Universidad Autónoma de Madrid (UAM)

Hacienda Pública Española / Review of Public Economics, 2025, vol. 254, issue 3, 119-156

Abstract: Based on the stability programs and the economic outlook of the OECD, this study analyses the sources of fiscal forecast errors in eleven eurozone countries over the period 1999 to 2020. For this purpose, through a panel data model with country and time fixed effects, we use economic, political, and institutional variables. One of the main innovations of this paper is the inclusion of shadow rates, an economic variable that reflects the monetary policies taken by the European Central Bank (ECB). We are not aware that this monetary variable has been included in previous work on fiscal forecast errors. This approach is more realistic since fiscal and monetary policy are closely connected. Particular attention will also be paid to the influence of Independent Fiscal Institutions (IFIs), given their importance in the recent process of reforming fiscal governance in eurozone countries. The results suggest that monetary policy has been a key element in increasing prudence in fiscal projections, but not in the case of the IFIs. Moreover, the inclusion of monetary policy does not change the direction of the relationship with the main economic variables identified in the literature. However, in several cases, the sign and the statistical significance of the political and institutional variables vary.

Keywords: Fiscal forecast errors; Independent Fiscal Institutions (IFIs); Shadow rates; Monetary policy; Panel Data (search for similar items in EconPapers)
JEL-codes: E58 E62 E63 H62 H68 (search for similar items in EconPapers)
Date: 2025
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