What Do Deficits Tell Us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU

25 Pages Posted: 15 Feb 2005

See all articles by Jürgen von Hagen

Jürgen von Hagen

University of Bonn - Institute of Economic Policy; Centre for Economic Policy Research (CEPR)

Guntram B. Wolff

Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

Date Written: November 2004

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.

Keywords: Fiscal rules, stock-flow adjustments, debt-deficit adjustments, stability and growth pact, excessive deficit procedures, ESA 95

JEL Classification: E62, H61, H62, H63, H70

Suggested Citation

von Hagen, Jürgen and Wolff, Guntram B., What Do Deficits Tell Us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU (November 2004). Available at SSRN: https://ssrn.com/abstract=664564

Jürgen Von Hagen (Contact Author)

University of Bonn - Institute of Economic Policy ( email )

Adenauerallee 24
D-53113 Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Guntram B. Wolff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Bonn - Center for European Integration Studies (ZEI) ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.uni-bonn.de/~guntram

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
2,481
PlumX Metrics