Institutional Quality and Official Forecast Performance in EU Member States

Medium-term budgetary frameworks are institutional arrangements at national level intended to improve official forecasts in EU member states. The influence of those frameworks on official forecasts of output growth and the budget balance ratio in 24 EU member states over the years 2008 to 2019 is quantified here using linear and quantile regression techniques. Statistical analysis shows undue optimism arising in forecasts of both variables in Stability and Convergence Programmes. The econometric analysis indicates that a member state being in an excessive deficit procedure and the economy being on the upside of the output cycle contribute to such a bias, particularly at those quantiles where forecast errors are at their most optimistic. The medium-term budgetary framework acts to offset such undue optimism, with that effect tending to be at its strongest at those particular quantiles. Such an institution then provides an ameliorating influence against general biases and political economy factors that cause forecast errors in official forecasts