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Public Choice

, Volume 170, Issue 1–2, pp 1–32 | Cite as

Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact

  • Niels D. Gilbert
  • Jasper F.M. de Jong
Article

Abstract

Enforcement of European fiscal rules, to a large extent, hinges on fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that (i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while (ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesize that the EC’s forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC’s fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3 % of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3 % threshold.

Keywords

Forecast errors Stability and Growth Pact Fiscal policy Political economy 

JEL Classification

C53 H3 H68 E62 

Notes

Acknowledgments

The views expressed in this paper are those of the authors and not necessarily the views of De Nederlandsche Bank. We would like to thank Peter Keus, Paul Mul and Rob Vet for help in constructing the dataset and Diederik Dicou, Peter van Els, Jakob de Haan, Jos Jansen, Cherry Muijsson, Andreas Pick, Maarten van ’t Riet, Wim Suyker, as well as the editor, William F. Shughart II, the anonymous referees, participants of the 30th Annual Congress of the European Economic Association in Mannheim, participants of the 2015 ‘Dutch Economists’ Day’(Nederlandse Economendag) in Amsterdam, and seminar participants at the Dutch central bank, for valuable comments and suggestions.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.De Nederlandsche BankAmsterdamThe Netherlands

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