Over-Optimism in Forecasts by Official Budget Agencies and its Implications

By Jeffrey A. Frankel. 2011

150 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f7685edea1d4897f768afb4ee747f996390d1ef1

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Citations in the corpus

Plausible 2005–2050 emissions scenarios project between 2 °C and 3 °C of warming by 2100 (2022, background): “…have been successively revised down in recent years, for reasons including faster-than-projected renewable energy deployment growth, slower coal growth, and slower economic growth (Frankel 2011, de Resende 2014, Ritchie and Dowlatabadi 2017, IEA 2019, 2020, 2021, Burgess et al 2020, 2021).”
Over-optimistic official forecasts and fiscal rules in the eurozone (2013, methodology): “One of the present authors (Frankel, 2011a,b) recently studied forecasts of real growth rates and budget balances made by official government agencies in 33 countries.”