Fiscal forecast errors: governments vs independent agencies?

Javier Pérez and Rossana Merola

No 4694, EcoMod2012 from EcoMod

Abstract: The fact that the literature tends to find biases in national fiscal projections has led to a growing claim in the academic and policy arenas for the need to introduce independent forecasts in the fiscal domain, prepared by independent agencies, like the European Commission (EC) in the case of Europe. Within this debate theaim of this paper is to test: (i) is the forecast performance record of governments indeed worse than that of international organizations?; (ii) are fiscal projections prepared by international organizations free from political economy distortions?; on related grounds, (iii) is it the case that government projections are less independent than EC (and OECD) fiscal forecasts? We build up a large real-time dataset for 15 European countries and focus on the period with a common fiscal policy regime, 1999-2007. The results point to the rejection of the three hypotheses; nevertheless, when the sample is split into ”good” and ”bad” times, the conclusions are toned down. Independent institutions were truly independent only in ”bad” times. We rationalize the empirical analysis in the framework of a model in which an independent agency tries to minimize the distance to the government forecast. We exploit the idea that the government’s information set includes private information not available to outside forecasters. We show how such a framework can rationalize the observed empirical evidenceand give some rationale to the strengthening of sanctions to misbehaving governments along the lines of the recent proposals suggested in European fora. See above See above

Keywords: 15 European countries; Finance; Forecasting; nowcasting (search for similar items in EconPapers)
Date: 2012-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Fiscal forecast errors: governments vs independent agencies? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ekd:002672:4694

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