What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU

Hagen, Jürgen von und Wolff, Guntram B. (Januar 2006): What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU. SFB/TR 15 Discussion Paper No. 148

Abstract

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.

• Dokumententyp: Paper
• Keywords: Fiscal rules, stock-flow adjustments, debt-deficit adjustments, stability and growth pact, excessive deficit procedure, ESA 95
• Fakultät: Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems ; Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A5 - Unvollständige Vertragsbeziehungen und die Gestaltung von Residualrechten
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: E62, H61, H62, H63, H70
• Sprache: Englisch