Bias in Official Fiscal Forecasts: Can Private Forecasts Help?

Jeffrey A. Frankel, Jesse Schreger

NBER Working Paper No. 22349
Issued in June 2016
NBER Program(s):International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w22349

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