What Do Deficits Tell Us About Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU

By J. Hagen, Guntram B. Wolff. Social Science Research Network, 2006

355 citations recorded by the source corpus.

Fiscal rules, such as the Excessive Deficit Procedure and the Stability and Growth Pact (SGP), aim at constraining government behavior. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule. We provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. The tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.

Subfields: Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/168533545aaf0a8c0572331fd201bbe6f868f8a4

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Citations in the corpus

• Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia (2006, neutral): “Relatively few studies investigate the use of ‘creative’ accounting in the EU.4 Von Hagen and Wolff (2006) are the first to analyze accounting tricks in order to comply with the rules of the SGP.”
• Fiscal institutions, fiscal policy and sovereign risk premia in EMU (2008, neutral): “14, 60431 Frankfurt, Germany e-mail: guntram.wolff@gmx.de ing to non-restricted items (e.g., von Hagen 1991; Bunch 1991; Kiewiet and Szakaly 1996; Dafflon and Rossi 1999; Milesi-Ferretti 2003, and von Hagen and Wolff 2006).”
• Ricardian fiscal regimes in the European Union (2008, neutral): “10 However, one should be aware that, for instance, measurement issues, and sizeable stock-flow adjustments, which can account for a relevant part of government debt accumulation, might blur such expected relationships as reported, for instance, by von Hagen and Wolff (2004).”
• Banking and Sovereign Risk in the Euro Area (2010, neutral): “Bernoth and Wolff (2008) document that sovereign bond markets also react to hidden fiscal policy items, the ”creative accounting” as defined in von Hagen and Wolff (2006) and Koen and van den Noord (2005).”
• Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework (2006, background): “…incentives to circumvent the rule without actually undertaking the requisite adjustment.8 Some countries made substantial recourse to one-offs, creative accounting, and fiscal gimmicks over the life of both the Maastricht treaty and the SGP (Koen and van den Noord, 2005; von Hagen and Wolff, 2004).”
• What Promotes Fiscal Consolidation: OECD Country Experiences (2007, background): “Kalbfleisch and Prentice (1980). In the analysis at hand durations are measured in terms of discrete one-year intervals.”
• Fiscal Rules for Sub-Central Governments: Design and Impact (2005, neutral): “Von Hagen and Wolff (2004) note that earlier empirical work shows that debt limits on American states and municipalities led to increases in debt issuance by unconstrained public bodies or provoked larger debt issuance by another level of government.”