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

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  • von Hagen, Jürgen
  • Wolff, Guntram B.

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 creative accounting depends on the reputation cost for the government and the economic cost of sticking to the rule. In this paper, 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. This 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.

Suggested Citation

  • von Hagen, Jürgen & Wolff, Guntram B., 2004. "What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU," Discussion Paper Series 1: Economic Studies 2004,38, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:2916
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    More about this item

    Keywords

    Fiscal rules; stock-flow adjustments; debt-deficit adjustments; stability and growth pact; excessive deficit procedure; ESA 95;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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