Worse than You Think: Public Debt Forecast Errors in Advanced and Developing Economies

69 Pages Posted: 14 May 2021

See all articles by Julia Estefania Flores

Julia Estefania Flores

International Monetary Fund (IMF)

Davide Furceri

International Monetary Fund (IMF)

Siddharth Kothari

International Monetary Fund (IMF)

Jonathan D. Ostry

International Monetary Fund (IMF)

Date Written: May 1, 2021

Abstract

We compile a unique dataset of medium-term public debt forecasts for an unbalanced panel of 174 countries, based on IMF (for the period 1995–2020) and Economist Intelligence Unit (2007–20) projections. We find that on average: (i) there is a positive forecast error (FE) in the debt-to-GDP projections—that is, realized debt ratios are larger than forecasts; (ii) the FE increases with the projection horizon and is statistically significant and large—about 10 percent of GDP at the five-year horizon; (iii) the magnitude is similar between advanced (AEs) and emerging markets and developing economies (EMDEs), and in EMDEs is present irrespective of recessions while for AEs is associated with surprise recessions in the forecast horizon; (iv) FEs are not statistically different between IMF program and non-program cases; (v) positive FEs are only partly attributable to optimism about growth; and (vi) oil-exporters and more volatile countries tend to have larger FEs. If FEs following the COVID crisis are in line with those that followed the Global Financial Crisis, average debt ratios in EMDEs would increase to close to 73 percent of GDP by 2025 instead of declining to 63 percent of GDP as currently forecast.

JEL Classification: H63, H68

Suggested Citation

Estefania Flores, Julia and Furceri, Davide and Kothari, Siddharth and Ostry, Jonathan D., Worse than You Think: Public Debt Forecast Errors in Advanced and Developing Economies (May 1, 2021). CEPR Discussion Paper No. DP16108, Available at SSRN: https://ssrn.com/abstract=3846219

Julia Estefania Flores (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Siddharth Kothari

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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