Working Paper: NBER ID: w22349
Authors: Jeffrey A. Frankel; Jesse Schreger
Abstract: Government forecasts of GDP growth and budget balances are generally more over-optimistic than private sector forecasts. When official forecasts are especially optimistic relative to private forecasts ex ante, they are more likely also to be over-optimistic relative to realizations ex post. For example, euro area governments during the period 1999-2007 assiduously and inaccurately avoided forecasting deficit levels that would exceed the 3% Stability and Growth Pact threshold; meanwhile private sector forecasters were not subject to this crude bias. As a result, using private sector forecasts as an input into the government budgeting-making process would probably reduce official forecast errors for budget deficits.
Keywords: Fiscal forecasts; Private sector forecasts; Overoptimism; Budget deficits; Stability and Growth Pact
JEL Codes: E62; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Private sector forecasts (F17) | Overoptimism in government budgeting (H68) |
| Official forecasts (H68) | Fiscal planning outcomes (H68) |
| Private sector forecasts (F17) | Fiscal planning outcomes (H68) |
| Official forecasts (H68) | Private sector forecasts (F17) |
| Official forecasts (H68) | Prediction error of official forecasts (C53) |
| Difference between official and private forecasts (H68) | Prediction error of official forecasts (C53) |