Open lecture: “Fiscal Procyclicality and Over-optimism in Official Forecasts” Jeffrey Frankel

The Bank of Latvia and the Stockholm School of Economics in Riga invite you to this guest lecture by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth, Harvard Kennedy School.

10:30 - 11:30 Monday 30/06/2014

SSE Riga, Soros Auditorium, Strelnieku 4a

Fiscal policy is distressingly procyclical in many countries, expanding during upswings and contracting during downswings. One reason for this may be the tendency for governments to think that booms will go on forever and thus that they can afford tax cuts and spending increases.   

Government forecasts of GDP growth and budget balances are generally overly optimistic, especially in booms.  Rules such as limits on the budget deficit do not solve the problem and in fact make the forecast bias worse. Our most recent research, of a sample of 31 countries, finds that official forecasts are also more over-optimistic than private sector forecasts. When official forecasts are especially optimistic relative to private forecasts ex ante, they are more likely to be over-optimistic relative to realizations ex post. 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; private sector forecasters were not subject to this crude bias. 

Three important implications: First, the severe recessions that began in 2008 do not explain the findings of optimism bias. Second, the over-optimism behaves as if specifically designed so as to provide “game” checks on budget deficits, rather than by politicians’ desire to “talk up” the economy in general. Third, the budget-making process could probably be improved by using private-sector forecasts.

Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government. He directs the program in international Finance and Macroeconomics at the National Bureau of Economic Research (NBER) where he is also a member of the Business Cycle Dating Committee.

Jeffrey Frankel has served at the Council of Economic Advisers (CEA) in 1983-84 and 1996-99. As CEA member appointed by President Clinton, Professor Frankel’s responsibilities included international economics, macroeconomics and the environment. He is currently on advisory panels for the Federal Reserve Banks of New York and Boston, the Peterson Institute for International Economics and the Commerce Department’s Bureau of Economic Analysis.

Research interests include commodities, currencies, crises, international finance, monetary and fiscal policy and global environmental issues. His research is ranked by IDEAs among the top 15 in terms of impact by economists. He writes monthly op-eds at Project Syndicate, articles at VoxEU and a blog.

Jeffrey Frankel was born in San Francisco, graduated from Swarthmore College and received his PhD from MIT.


Andris Strazds, Adviser, the Bank of Latvia

Presentation by by Jeffrey Frankel

2.78 MB, pdf

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