7
GDP, a widely used measure of the discretionary change in fiscal policy for which we have
forecasts.
6
Positive values of ΔF
i,t:t+1
indicate fiscal consolidation, while negative values
indicate discretionary fiscal stimulus. The associated forecast is “Forecast of ΔF
i,t:t+1|t
”
defined as f { F
t+1,,i
– F
t–1,i
| Ω
t
}. Under the null hypothesis that fiscal multipliers used for
forecasting were accurate, the coefficient, β, should be zero.
7
Our data come from the IMF’s
WEO database. We have posted the underlying data and estimation codes required to
replicate all the results reported in this paper on the IMF’s website.
8
As explained above, we focus in our baseline on forecasts made for European economies in
early 2010. Growth forecast errors thus measure the difference between actual cumulative
real GDP (year-over-year) growth during 2010–11, based on the latest data, minus the
forecast prepared for the April 2010 WEO (IMF, 2010c).
9
The forecast of fiscal consolidation
is the forecast of the change in the structural fiscal balance as a percent of potential GDP
during 2010–11, as prepared for the April 2010 WEO. We use all available data for the
European Union’s (EU’s) 27 member states, as well as for the remaining three European
economies classified as “advanced” in the WEO database: Iceland, Norway, and Switzerland.
WEO forecasts of the structural fiscal balance made in April 2010 are unavailable for
Estonia, Latvia, Lithuania, and Luxembourg. Thus, based on data availability, our baseline
sample consists of 26 economies (27 + 3 – 4).
10
As we report below, filling the four missing
6
As the WEO data appendix explains,
“The structural budget balance refers to the general government cyclically adjusted balance adjusted
for nonstructural elements beyond the economic cycle. These include temporary financial sector and
asset price movements as well as one-off, or temporary, revenue or expenditure items. The cyclically
adjusted balance is the fiscal balance adjusted for the effects of the economic cycle; see, for example,
A. Fedelino. A. Ivanova and M. Horton ‘Computing Cyclically Adjusted Balances and Automatic
Stabilizers’ IMF Technical Guidance Note No. 5,
http://www.imf.org/external/pubs/ft/tnm/2009/tnm0905.pdf
.”
We express the structural balance as a ratio to potential GDP, but results based on the structural balance
expressed as a ratio to nominal GDP are very similar, as we report below.
7
Estimates of equation (1) thus provide a simple test of forecast efficiency. Under the null of forecast
efficiency, information known when the forecasts were made should be uncorrelated with subsequent forecast
errors. A finding that the coefficient β is negative would indicate that forecasters tended to be optimistic
regarding the level of growth associated with fiscal consolidation.
8
The data can be found at http://www.imf.org/external/pubs/ft/wp/2013/Data/wp1301.zip. We have posted the
underlying dataset in Excel and STATA, along with the STATA codes that produce all the empirical results,
and a “Readme” file with replication instructions. One series used in Table 6 of the appendix, namely the IMF
vulnerability rating, is confidential information and could not be included in the data file.
9
Throughout this paper, forecast errors are computed relative the latest (October 2012 WEO) database.
10
The 26 economies are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Germany, Denmark, Finland,
France, Greece, Hungary, Ireland, Iceland, Italy, Malta, Netherlands, Norway, Poland, Portugal, Romania,
Slovak Republic, Slovenia, Spain, Sweden, Switzerland, and the United Kingdom.