Fiscal Deficit Forecasts by International Institutions: Evidence for a Double Standard?

Rybacki, Jakub (2019): Fiscal Deficit Forecasts by International Institutions: Evidence for a Double Standard?

Abstract

Fiscal forecasts produced by international financial institutions came under strong criticism after the Eurozone sovereign debt crisis due to overly optimistic estimates for heavily indebted countries like Spain, Italy, and Portugal. Presently, in the face of strong divisions within the European political landscape, international organizations have also been accused of applying a double standard. Opponents often claim those organizations depict a more negative picture for governments described as populist in the mainstream media. The aim of this paper is to evaluate fiscal forecasts provided by the International Monetary Fund (IMF), European Commission (EC), and the Organization for Economic Co-operation and Development (OECD). Our analysis is based on a panel of European Union economies, other OECD members, and large non-OECD economies (e.g., China). Five years after the Sovereign debt crisis, we still find negative phenomenon reported earlier in the literature. In Europe, all organizations systematically present overly optimistic deficit forecasts for Portugal, Spain, and, to a lower extent, for Italy. Moreover, the EC and OECD are being indulgent to countries under the excessive deficit procedure. There is also an evidence for strong autocorrelation of ex-post fiscal forecast errors. On the other hand, we find no strong evidence suggesting that fiscal forecasts stigmatize the governments accused of populism or violating the rule of law. Finally, in the case of European emerging economies, some kind of wishful thinking is present. For example, the EC overestimates governments’ propensity to tighten fiscal policy during the expansion period of a business cycle and forecasts an overly pessimistic picture during a slowdown.

• Item Type: MPRA Paper
• Language: English
• Keywords: deficit forecasts, excessive deficit procedure
• Subjects: H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

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