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

Jürgen von Hagen; Guntram B. Wolff

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 depends on the reputation cost for the government and the economic cost of sticking to the rule. 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. The 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.

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Year of publication:	2006
Authors:	Hagen, Jürgen von ; Wolff, Guntram B.
Publisher:	Mannheim [u.a.] : Sonderforschungsbereich/Transregio 15
Subject:	Fiscal rules \| stock-flow adjustments \| debt-deficit adjustments \| stability and growth pact \| excessive deficit procedure \| ESA 95 \| Öffentliche Schulden \| Public debt \| Europäischer Stabilitätsmechanismus \| European Stability Mechanism \| Finanzpolitik \| Fiscal policy \| EU-Staaten \| EU countries \| Konvergenzkriterien \| Convergence criteria \| Haushaltsdefizit \| Budget deficit \| Finanzkontrolle \| Fiscal control \| Haushaltskonsolidierung \| Fiscal consolidation \| Öffentliches Rechnungswesen \| Public accounting