Over-optimism in Forecasts by Official Budget Agencies and Its Implications

Jeffrey Frankel

No 17239, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries. In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons. This over-optimism in official forecasts can help explain excessive budget deficits, especially the failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary. Many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland's Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP. One country, Chile, has managed to overcome governments' tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile's official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession.

JEL-codes: E62 H50 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
Note: IFM
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Citations: View citations in EconPapers (121)

Published as Jeffrey Frankel, 2011. "Over-optimism in forecasts by official budget agencies and its implications," Oxford Review of Economic Policy, Oxford University Press, vol. 27(4), pages 536-562.

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Journal Article: Over-optimism in forecasts by official budget agencies and its implications (2011)
Working Paper: Over-optimism in Forecasts by Official Budget Agencies and its Implications (2011)
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