## _wp1239

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---

### I. Introduction: purpose and scope
- Objective: Investigate factors driving discrepancies between the annual change in gross public debt and the budget deficit (stock-flow adjustments) and whether they tend to be lower in countries that are more fiscally transparent.
- Sample: 163 countries over the last three decades (1980–2010).
- Fiscal transparency measurement: index combining IMF’s Fiscal Transparency Report on Observance of Standards and Codes (Hameed, 2005) and quality of budget institutions compiled by Dabla-Norris et al (2010).
- Key hypothesis: Greater fiscal transparency reduces stock-flow adjustments by increasing scrutiny and limiting accounting stratagems and low-quality statistical reporting.

### II. Definition and accounting identity
- Stock-flow adjustments (SF) defined as: annual change in gross debt minus the budget deficit.
- Debt accumulation identity (structure preserved):
  - Change in debt-to-GDP ratio equals:
    - interest-growth differential (effective interest rate on debt minus nominal GDP growth rate, multiplied by lagged debt-to-GDP ratio)
    - plus the primary deficit
    - plus the stock-flow adjustment.
- Interpretation:
  - Interest-growth differential raises the debt ratio when large.
  - Stock-flow adjustments can arise from valuation effects (exchange rates on foreign-currency debt), timing/recording differences (accrual vs cash), and below-the-line operations (privatization, transactions in financial assets).
  - Large and persistent positive SF may reflect inappropriate recording or accounting stratagems leading to ex-post upward revisions of deficit levels.

### III. Descriptive cross-country evidence (1980–2010)
- Aggregate patterns:
  - Weighted-average stock-flow adjustments are positive on average in advanced, emerging, and low-income economies.
  - Low-income economies exhibit the largest average residual entities and greatest volatility.
  - Several peaks in weighted-average SF coincide with major crises (e.g., Asian Crisis, Argentine Crisis, Great Recession).
- Extremes in low-income group:
  - Stock-flow adjustments range from negative 108.6 percent of GDP to 168.5 percent of GDP (1980–2010).
  - Causes include large debt relief/forgiveness (negative SF) and exchange rate depreciations with large foreign-currency debt shares (positive SF).
- Cumulative debt vs accumulated deficits (1980–2010):
  - In almost all countries public debt stocks in 2010 exceeded the sum of initial 1980 debt and accumulated deficits 1981–2010 when expressed relative to 2010 nominal GDP.
  - Out of 163 economies (34 advanced, 68 emerging, 61 low-income), only 38 (5 advanced, 11 emerging, 22 low-income) register negative cumulative stock-flow adjustments between 1981 and 2010.
  - Robustness: Ending the period in 2007 yields 41 economies (5 advanced, 14 emerging, 22 low-income) with non-positive cumulative SF.

### IV. Distributional statistics (Table 1: The Distribution of Stock-Flow Adjustments, 1980–2010)
- All countries (All): Sample mean 2.8 percent of GDP; Std 11.4; Min -108.6; Max 168.5; N 163; Obs 2364.
- All countries (Without outliers*): Sample mean 2.6 percent of GDP; Std 6.5; Min -15.8; Max 30.8; N 163; Obs 2270.
- Advanced (All): Sample mean 2.3 percent of GDP; Std 4.9; Min -9.8; Max 44.0; N 34; Obs 705.
- Advanced (Without outliers*): Sample mean 2.0 percent of GDP; Std 3.6; Min -4.1; Max 18.3; N 34; Obs 677.
- Emerging (All): Sample mean 2.9 percent of GDP; Std 9.1; Min -36.5; Max 103.1; N 68; Obs 905.
- Emerging (Without outliers*): Sample mean 2.5 percent of GDP; Std 5.7; Min -9.5; Max 27.3; N 67; Obs 869.
- Low-Income (All): Sample mean 3.2 percent of GDP; Std 16.9; Min -108.6; Max 168.5; N 61; Obs 754.
- Low-Income (Without outliers*): Sample mean 3.0 percent of GDP; Std 10.6; Min -32.5; Max 42.9; N 61; Obs 724.
- Notes: *Outliers are the top and bottom 2 percentiles of the stock-flow adjustments. Std denotes the standard deviation, N the number of countries, and Obs the number of observations.

### V. Main empirical findings and interpretation
- Persistence and asymmetry:
  - Many countries recorded persistently positive and large stock-flow adjustments over the past three decades.
  - Stock-flow adjustments contributed significantly to debt increases but played a minor role in explaining debt decreases—an asymmetry that is surprising given potential downward SF drivers (privatization, exchange-rate appreciation).
  - Interpretation: Governments may use off-budget operations to hide deficit impacts of debt-increasing transactions while allowing debt-reducing measures to pass through the budget; reputational concerns over missing numerical budget balance targets may drive this behavior.
- Econometric evidence:
  - Stock-flow adjustments can be partly explained by balance sheet effects and realization of contingent liabilities.
  - Significant cross-country differences in average SF remain after accounting for these factors and are captured by country-specific fixed effects.
  - The more fiscally transparent the country, the smaller the country-specific fixed-effect component of SF.
  - Contribution of SF to debt increases is smaller in countries with above-average fiscal transparency.
- Policy implication: Fiscal transparency likely reduces stock-flow adjustments by permitting greater scrutiny of fiscal accounts and limiting accounting stratagems and low-quality statistical systems.

### VI. The role of stock-flow adjustments in explaining large changes in public debt
- Major episodes of debt changes are defined as changes of more than 10 percentage points in the gross public debt-to-GDP ratios while allowing temporary reversals.
- Debt decomposition follows equation (2): primary deficit, interest-growth differential, and the stock-flow adjustment.
- Between 1980 and 2010:
  - Average debt increase by country group:
    - Advanced economies: 25 percent of GDP
    - Emerging economies: 31 percentage points
    - Low-income economies: 33 percentage points
  - Contribution to average debt increases:
    - More than half of the average debt increase was explained by stock-flow adjustments.
    - Primary deficits:
      - Substantial contributor in advanced economies.
      - Smaller contribution in emerging and low-income economies.
  - Average debt decreases:
    - Advanced economies: average decrease of 18 percentage points of GDP
    - Emerging economies: average decrease of 44 percentage points of GDP
    - Low-income economies: average decrease of 62 percentage points of GDP
  - Contributors to debt decreases:
    - Advanced economies: primary surpluses were the main contributor.
    - Emerging and low-income economies: combination of rapid output growth and low interest rates accounted for most debt decreases.
- Observed asymmetry:
  - Stock-flow adjustments were a significant source of debt increases but played only a minor role in explaining debt decreases.
  - Possible explanations include governments engaging in off-budget transactions to hide debt-increasing impacts while allowing debt-reducing measures to pass through the budget.
- Selected decomposition values (percent of GDP):
  - Emerging Economies (average increase of 31 percentage points):
    - Primary deficit: 6.4
    - Interest-growth differential: 1.3
    - Stock-flow adjustment: 22.9
  - Low-Income Economies (average debt increase 33 percentage points):
    - Primary deficit: 8.2
    - Interest-growth differential: -14.9
    - Stock-flow adjustment: 40.0
  - Advanced Economies (average increase of 25 percentage points):
    - Primary deficit: 9.1
    - Interest-growth differential: 2.7
    - Stock-flow adjustment: 13.3
  - Sources of Debt Decreases (percent of GDP):
    - Advanced Economies (average decrease of 18 percentage points):
      - Primary surplus: 13.2
      - Interest-growth differential: 8.7
      - Stock-flow adjustment: -3.5
    - Emerging Economies (average decrease of 44 percentage points):
      - Primary surplus: 20.5
      - Interest-growth differential: 36.9
      - Stock-flow adjustment: -13.7
    - Low-Income Economies (average decrease of 62 percentage points):
      - Primary surplus: 2.6
      - Interest-growth differential: 49.1
      - Stock-flow adjustment: 9.7

### VII. The main determinants of stock-flow adjustments (1980–2010)
A. The Role of Financial Transactions
- Difference between gross and net debt captures financial transactions; government assets netted in net debt.
- For a majority of advanced economies with data, changes in financial assets account for a large proportion of stock-flow adjustments.
- Incentives and mechanisms:
  - Countries may invest budget surpluses into financial assets instead of repaying debt.
  - Numerical budget balance rules may incentivize shifting expenditure below the line (e.g., capital injections into public companies excluded from fiscal accounts).
- Table 2. Advanced Economies: Transactions of Financial Assets, 1980–2010 (Percent of GDP)
  - Mean, Obs:
    - All transactions (accumulations and decumulations): 2.0, 25559
    - Accumulations: 3.6, 25411
    - Accumulations excluding banking crises:
      - All: 3.5, 25370
      - Surplus countries: 6.8, 797
      - Numeric budget balance rules and deficit: 2.0, 1494
- Qualitative distribution:
  - Excluding banking crises, about one-third of financial asset accumulations occurred in surplus countries (Denmark, Estonia, Finland, Korea, Norway, New Zealand, Sweden).
  - Another third took place in countries with numeric budget balance rules that were experiencing deficits.

B. Cross-Country Panel Regressions
- Regression approach: unbalanced fixed effects panel regressions with instrumental variable Arellano-Bond (1991) where appropriate.
- Advanced economies:
  - Fiscal costs from banking crises significantly contributed to stock-flow adjustments over 1980–2010.
  - Valuation effects do not play a significant role given negligible public debt held in foreign currency in most advanced economies.
- Emerging and low-income economies:
  - Banking crises, valuation effects, and debt forgiveness or reduction were the main determinants of stock-flow adjustments.
- Table 3. Unbalanced Fixed Effects Panel Regressions 1980–2010 (Stock-Flow Adjustments as Dependent Variable, Percent of GDP)
  - Advanced column:
    - Constant: -0.89 (0.47)*
    - Inflation: 0.06 (0.06)
    - Valuation effect: 0.00 (0.00)
    - Banking crises: 5.33 (0.70)***
    - R-squared (within): 0.17
    - R-squared with country fixed effects: 0.12
    - Observations: 313
    - Number of countries: 20
  - Emerging and Low-Income column:
    - Constant: 1.66 (0.38)***
    - Inflation: 0.18 (0.03)***
    - Valuation effect: 0.75 (0.06)***
    - Debt forgiveness or reduction (percent of GDP): -0.46 (0.06)***
    - Banking crises: 3.92 (1.84)**
    - R-squared (within): 0.19
    - R-squared with country fixed effects: 0.24
    - Observations: 1316
    - Number of countries: 102
- Interpretation notes:
  - Valuation effect defined as percentage change in real effective exchange rate interacted with public sector debt in foreign currency (percent of GDP); positive change denotes exchange rate depreciation.
  - Debt forgiveness or reduction refers to total amount of debt (percent of GDP) forgiven or reduced.
  - In advanced economies, banking crises variable denotes fiscal costs spread equally over crisis duration; in emerging/low-income economies it is a dummy = 1 during a banking crisis.
- Country fixed effects:
  - Explain about 12 percent of variance in stock-flow adjustments for advanced economies and 24 percent for emerging and low-income economies.
  - May reflect measurement issues or differing propensities for creative accounting.
- Robustness:
  - Arellano-Bond dynamic GMM regressions with annual change in debt level as dependent variable show:
    - Advanced: Overall Budget Balance coefficient -0.69 (0.21)***; Banking crises 7.96 (1.40)***.
    - Emerging and Low-Income: Overall Budget Balance coefficient -1.46 (0.20)***; Inflation 0.17 (0.37)***; Valuation effect 0.75 (0.06)***; Debt forgiveness or reduction -0.23 (0.09)***; Banking crises 6.40 (3.30)**.
    - Observations and country counts: Advanced 292 obs, 20 countries; Emerging and Low-Income 1214 obs, 102 countries.

### VIII. Stock-flow adjustments and fiscal transparency
- Fiscal transparency (IMF, 2007): openness about government structure and functions, fiscal policy intentions, public sector accounts, and projections.
- Data:
  - Fiscal Transparency ROSC (Hameed, 2005) — covers 90 countries including advanced economies.
  - Budget institutions index (Dabla-Norris et al., 2010) — transparency component for 72 low-income and emerging economies.
  - Merge: average difference for 41 overlapping countries used to construct broader dataset; final dataset includes 87 countries with fixed effects and fiscal transparency.
- Empirical results:
  - Greater fiscal transparency is associated with lower country fixed effects from cross-country regressions.
  - Regression summaries (Figure 5):
    - Regression 1: All observations
      - y = -1.12x + 5.05
      - (0.25)*  (0.62)*
      - R² = 0.19, N = 87
    - Regression 2: Without outliers
      - y = -0.85x + 4.17
      - (0.18)* (0.44)*
      - R² = 0.21, N = 83
    - Regression 3: EMEs and LICs only
      - y = -0.77x + 3.99
      - (0.24)*   (0.53)*
      - R² = 0.13, N = 73
  - Higher values of the fiscal transparency index denote greater fiscal transparency. Absolute values of fixed effects (percent of GDP) used as dependent variable.
- Composition of debt increases by transparency group (1980–2010):
  - Countries with above average fiscal transparency show a significantly smaller contribution of stock-flow adjustments to increases in debt than countries with below average fiscal transparency.
  - This holds for both advanced economies and emerging and low-income economies.
- Caution on causality:
  - Correlation evident; causality could run either direction (greater transparency reduces scope for concealment, or less incentive to conceal fosters greater transparency).

### IX. Conclusion
- Over 1980–2010 there have been many episodes of large discrepancies between annual change in gross debt and the budget deficit (stock-flow adjustments).
- Stock-flow adjustments were often positive and persistent; public debt stocks in many countries are higher than accumulated deficits imply.
- Some stock-flow adjustments have legitimate accounting explanations, but significant unexplained differences exist across countries that reflect country-specific characteristics.
- These country-specific factors tend to be higher in countries with below average fiscal transparency, suggesting a lack of fiscal transparency may make it easier for governments to engage in deceptive fiscal stratagems.

### X. Appendix A. Data sources (selected entries)
- Data span 1980 to 2010 (based on availability). Calendar year general government data from WEO.
- Key sources listed as in the source:
  - Overall Fiscal Balance: IMF World Economic Outlook (WEO), June 2011
  - Gross Debt: IMF World Economic Outlook (WEO), June 2011
  - Net Debt: IMF World Economic Outlook (WEO), June 2011
  - Nominal GDP: IMF World Economic Outlook (WEO), June 2011
  - Net Interest Payments: IMF World Economic Outlook (WEO), June 2011
  - Primary Balance: IMF World Economic Outlook (WEO), June 2011
  - Inflation: IMF World Economic Outlook (WEO), June 2011
  - Numerical Budget balance rule: Fiscal Rules database by the IMF’s Fiscal Affairs Department; Fiscal Policy and Surveillance Division (2009)
  - Real Effective Exchange Rate: IFS
  - Public sector debt denoted in foreign currency – Advanced Economies: OECD
  - Public sector debt denoted in foreign currency – Emerging and Low-Income Economies: World Bank Global Development Finance Database
  - Debt Forgiveness or Reduction: World Bank Global Development Finance Database
  - Banking Crisis dummy and Fiscal Costs of Banking Crisis: IMF Financial Crisis Episodes Database (Laeven and Valencia, 2010)
  - Budget Institutions Index – Transparency Component: Dabla-Norris et al. (2010)
  - Fiscal Transparency ROSC Database: IMF Fiscal Transparency Report on Observance of Standards and Codes (ROSC)

*Italic: Source — Country authorities; IMF staff estimates and calculations as presented in the content unit.*

### References .............................................................................................................

### _wp1239 - References .............................................................................................................

### I. Introduction: purpose and scope
- Objective: Investigate factors driving discrepancies between the annual change in gross public debt and the budget deficit (stock-flow adjustments) and whether they tend to be lower in countries that are more fiscally transparent.
- Sample: 163 countries over the last three decades (1980–2010).
- Fiscal transparency measurement: index combining IMF’s Fiscal Transparency Report on Observance of Standards and Codes (Hameed, 2005) and quality of budget institutions compiled by Dabla-Norris et al (2010).
- Key hypothesis: Greater fiscal transparency reduces stock-flow adjustments by increasing scrutiny and limiting accounting stratagems and low-quality statistical reporting.

### II. Definition and accounting identity
- Stock-flow adjustments (SF) defined as: annual change in gross debt minus the budget deficit.
- Debt accumulation identity (equation structure preserved in source):
  - Change in debt-to-GDP ratio equals:
    - interest-growth differential (effective interest rate on debt minus nominal GDP growth rate, multiplied by lagged debt-to-GDP ratio)
    - plus the primary deficit
    - plus the stock-flow adjustment.
- Interpretation:
  - Interest-growth differential raises the debt ratio when large.
  - Stock-flow adjustments can arise from valuation effects (exchange rates on foreign-currency debt), timing/recording differences (accrual vs cash), and below-the-line operations (privatization, transactions in financial assets).
  - Large and persistent positive SF may reflect inappropriate recording or accounting stratagems leading to ex-post upward revisions of deficit levels.

### III. Descriptive cross-country evidence (1980–2010)
- Aggregate patterns:
  - Weighted-average stock-flow adjustments are positive on average in advanced, emerging, and low-income economies.
  - Low-income economies exhibit the largest average residual entities and greatest volatility.
  - Several peaks in weighted-average SF coincide with major crises (e.g., Asian Crisis, Argentine Crisis, Great Recession).
- Extremes in low-income group:
  - Stock-flow adjustments range from negative 108.6 percent of GDP to 168.5 percent of GDP (1980–2010).
  - Causes include large debt relief/forgiveness (negative SF) and exchange rate depreciations with large foreign-currency debt shares (positive SF).
- Cumulative debt vs accumulated deficits (1980–2010):
  - In almost all countries public debt stocks in 2010 exceeded the sum of initial 1980 debt and accumulated deficits 1981–2010 when expressed relative to 2010 nominal GDP.
  - Out of 163 economies (34 advanced, 68 emerging, 61 low-income), only 38 (5 advanced, 11 emerging, 22 low-income) register negative cumulative stock-flow adjustments between 1981 and 2010.
  - Robustness: Ending the period in 2007 yields 41 economies (5 advanced, 14 emerging, 22 low-income) with non-positive cumulative SF.

### IV. Distributional statistics (Table 1: The Distribution of Stock-Flow Adjustments, 1980–2010)
- All countries (All): Sample mean 2.8 percent of GDP; Std 11.4; Min -108.6; Max 168.5; N 163; Obs 2364.
- All countries (Without outliers*): Sample mean 2.6 percent of GDP; Std 6.5; Min -15.8; Max 30.8; N 163; Obs 2270.
- Advanced (All): Sample mean 2.3 percent of GDP; Std 4.9; Min -9.8; Max 44.0; N 34; Obs 705.
- Advanced (Without outliers*): Sample mean 2.0 percent of GDP; Std 3.6; Min -4.1; Max 18.3; N 34; Obs 677.
- Emerging (All): Sample mean 2.9 percent of GDP; Std 9.1; Min -36.5; Max 103.1; N 68; Obs 905.
- Emerging (Without outliers*): Sample mean 2.5 percent of GDP; Std 5.7; Min -9.5; Max 27.3; N 67; Obs 869.
- Low-Income (All): Sample mean 3.2 percent of GDP; Std 16.9; Min -108.6; Max 168.5; N 61; Obs 754.
- Low-Income (Without outliers*): Sample mean 3.0 percent of GDP; Std 10.6; Min -32.5; Max 42.9; N 61; Obs 724.
- Notes: *Outliers are the top and bottom 2 percentiles of the stock-flow adjustments. Std denotes the standard deviation, N the number of countries, and Obs the number of observations.

### V. Main empirical findings and interpretation
- Persistence and asymmetry:
  - Many countries recorded persistently positive and large stock-flow adjustments over the past three decades.
  - Stock-flow adjustments contributed significantly to debt increases but played a minor role in explaining debt decreases—an asymmetry that is surprising given potential downward SF drivers (privatization, exchange-rate appreciation).
  - Interpretation: Governments may use off-budget operations to hide deficit impacts of debt-increasing transactions while allowing debt-reducing measures to pass through the budget; reputational concerns over missing numerical budget balance targets may drive this behavior.
- Econometric evidence:
  - Stock-flow adjustments can be partly explained by balance sheet effects and realization of contingent liabilities.
  - Significant cross-country differences in average SF remain after accounting for these factors and are captured by country-specific fixed effects.
  - The more fiscally transparent the country, the smaller the country-specific fixed-effect component of SF.
  - Contribution of SF to debt increases is smaller in countries with above-average fiscal transparency.
- Policy implication: Fiscal transparency likely reduces stock-flow adjustments by permitting greater scrutiny of fiscal accounts and limiting accounting stratagems and low-quality statistical systems.

### VI. Paper organization and additional materials (as structured in source)
- Section II: accounting identities and summary statistics.
- Section III: sources of large debt changes and contribution of SF.
- Section IV: determinants of residual entities (SF).
- Section V: relationship between fiscal transparency and SF.
- Section VI: conclusions.
- Appendices include: A. Data Sources; B. Additional Panel Regressions- Robustness Analysis; Appendix Tables A1 and A2.

*Source: _wp1239 - References (PDF chapter/section) — content pages and tables/figures as provided in the source document.*

### 2010. The higher prevalence of negative cumulative stock-flow adjustments in low-income

### _wp1239 - 2010. The higher prevalence of negative cumulative stock-flow adjustments in low-income

### III. THE ROLE OF STOCK-FLOW ADJUSTMENTS IN EXPLAINING LARGE CHANGES IN PUBLIC DEBT
- Major episodes of debt changes are defined as changes of more than 10 percentage points in the gross public debt-to-GDP ratios while allowing temporary reversals.
- Debt decomposition follows equation (2): primary deficit, interest-growth differential, and the stock-flow adjustment.
- Between 1980 and 2010:
  - Average debt increase by country group:
    - Advanced economies: 25 percent of GDP
    - Emerging economies: 31 percentage points (average increase)
    - Low-income economies: 33 percentage points (average debt increase)
  - Contribution to average debt increases:
    - More than half of the average debt increase was explained by stock-flow adjustments.
    - Primary deficits:
      - Substantial contributor in advanced economies.
      - Smaller contribution in emerging and low-income economies.
  - Average debt decreases:
    - Advanced economies: average decrease of 18 percentage points of GDP
    - Emerging economies: average decrease of 44 percentage points of GDP
    - Low-income economies: average decrease of 62 percentage points of GDP
  - Contributors to debt decreases:
    - Advanced economies: primary surpluses were the main contributor.
    - Emerging and low-income economies: combination of rapid output growth and low interest rates accounted for most debt decreases.
- Observed asymmetry:
  - Stock-flow adjustments were a significant source of debt increases but played only a minor role in explaining debt decreases.
  - Possible explanations include governments engaging in off-budget transactions to hide debt-increasing impacts while allowing debt-reducing measures to pass through the budget.
  - Reputational and other costs associated with missing publicly announced deficit targets may motivate such behavior.

- Selected decomposition values shown in Figures (percent of GDP):
  - Emerging Economies (average increase of 31 percentage points):
    - Primary deficit: 6.4
    - Interest-growth differential: 1.3
    - Stock-flow adjustment: 22.9
  - Low-Income Economies (average debt increase 33 percentage points):
    - Primary deficit: 8.2
    - Interest-growth differential: -14.9
    - Stock-flow adjustment: 40.0
  - Advanced Economies (average increase of 25 percentage points):
    - Primary deficit: 9.1
    - Interest-growth differential: 2.7
    - Stock-flow adjustment: 13.3
  - Sources of Debt Decreases (percent of GDP):
    - Advanced Economies (average decrease of 18 percentage points):
      - Primary surplus: 13.2
      - Interest-growth differential: 8.7
      - Stock-flow adjustment: -3.5
    - Emerging Economies (average decrease of 44 percentage points):
      - Primary surplus: 20.5
      - Interest-growth differential: 36.9
      - Stock-flow adjustment: -13.7
    - Low-Income Economies (average decrease of 62 percentage points):
      - Primary surplus: 2.6
      - Interest-growth differential: 49.1
      - Stock-flow adjustment: 9.7

### IV. THE MAIN DETERMINANTS OF STOCK-FLOW ADJUSTMENTS OVER THE PAST THREE DECADES
A. The Role of Financial Transactions
- Difference between gross and net debt captures financial transactions; government assets netted in net debt.
- For a majority of advanced economies with data, changes in financial assets account for a large proportion of stock-flow adjustments.
- Incentives and mechanisms:
  - Countries may invest budget surpluses into financial assets instead of repaying debt.
  - Numerical budget balance rules may incentivize shifting expenditure below the line (e.g., capital injections into public companies excluded from fiscal accounts).
- Figure 4 and Table 2 (Percent of GDP) summary:
  - Table 2. Advanced Economies: Transactions of Financial Assets, 1980–2010
    - Mean, Obs:
      - All transactions (accumulations and decumulations): 2.0, 25559
      - Accumulations: 3.6, 25411
      - Accumulations excluding banking crises:
        - All: 3.5, 25370
        - Surplus countries: 6.8, 797
        - Numeric budget balance rules and deficit: 2.0, 1494
- Qualitative distribution:
  - Excluding banking crises, about one-third of financial asset accumulations occurred in surplus countries (Denmark, Estonia, Finland, Korea, Norway, New Zealand, Sweden).
  - Another third took place in countries with numeric budget balance rules that were experiencing deficits.

B. Cross-Country Panel Regressions
- Regression approach: unbalanced fixed effects panel regressions with instrumental variable Arellano-Bond (1991) where appropriate.
- Advanced economies:
  - Fiscal costs from banking crises significantly contributed to stock-flow adjustments over 1980–2010.
  - Valuation effects do not play a significant role given negligible public debt held in foreign currency in most advanced economies.
- Emerging and low-income economies:
  - Banking crises, valuation effects, and debt forgiveness or reduction were the main determinants of stock-flow adjustments.
- Table 3. Unbalanced Fixed Effects Panel Regressions 1980–2010, with Stock-Flow Adjustments as the Dependent Variable (Percent of GDP):
  - Advanced column (coefficients with robust standard errors in parentheses):
    - Constant: -0.89 (0.47)*
    - Inflation: 0.06 (0.06)
    - Valuation effect: 0.00 (0.00)
    - Banking crises: 5.33 (0.70)***
    - R-squared (within): 0.17
    - R-squared with country fixed effects: 0.12
    - Observations: 313
    - Number of countries: 20
  - Emerging and Low-Income column:
    - Constant: 1.66 (0.38)***
    - Inflation: 0.18 (0.03)***
    - Valuation effect: 0.75 (0.06)***
    - Debt forgiveness or reduction (percent of GDP): -0.46 (0.06)***
    - Banking crises: 3.92 (1.84)**
    - R-squared (within): 0.19
    - R-squared with country fixed effects: 0.24
    - Observations: 1316
    - Number of countries: 102
- Interpretation notes:
  - Valuation effect defined as percentage change in real effective exchange rate interacted with public sector debt in foreign currency (percent of GDP); positive change denotes exchange rate depreciation.
  - Debt forgiveness or reduction refers to total amount of debt (percent of GDP) forgiven or reduced.
  - In advanced economies, banking crises variable denotes fiscal costs spread equally over crisis duration; in emerging/low-income economies it is a dummy = 1 during a banking crisis.
- Country fixed effects:
  - Explain about 12 percent of variance in stock-flow adjustments for advanced economies and 24 percent for emerging and low-income economies.
  - May reflect measurement issues or differing propensities for creative accounting.

- Robustness: Additional panel regressions (Arellano-Bond dynamic GMM) with annual change in debt level as dependent variable show related findings:
  - Table A2 highlights:
    - Advanced: Overall Budget Balance coefficient -0.69 (0.21)***; Banking crises 7.96 (1.40)***.
    - Emerging and Low-Income: Overall Budget Balance coefficient -1.46 (0.20)***; Inflation 0.17 (0.37)***; Valuation effect 0.75 (0.06)***; Debt forgiveness or reduction -0.23 (0.09)***; Banking crises 6.40 (3.30)**.
    - Observations and country counts: Advanced 292 obs, 20 countries; Emerging and Low-Income 1214 obs, 102 countries.
    - Arellano-Bond AR(1) and AR(2) test statistics and Hansen overid. test statistics reported.

### V. STOCK-FLOW ADJUSTMENTS AND FISCAL TRANSPARENCY
- Fiscal transparency defined per IMF (2007): openness about government structure and functions, fiscal policy intentions, public sector accounts, and projections.
- Data used:
  - Fiscal Transparency ROSC (Hameed, 2005) — covers 90 countries including advanced economies.
  - Budget institutions index (Dabla-Norris et al., 2010) — provides a transparency component for 72 low-income and emerging economies.
  - Merging approach: average difference between the two indices for 41 overlapping countries used to construct a broader dataset; final dataset includes 87 countries with fixed effects and fiscal transparency.
- Main empirical findings:
  - Greater fiscal transparency is associated with lower country fixed effects from cross-country regressions.
  - Regression summaries (Figure 5):
    - Regression 1: All observations
      - y = -1.12x + 5.05
      - (0.25)*  (0.62)*
      - R² = 0.19, N = 87
    - Regression 2: Without outliers (outliers removed using automated STATA based on leverage and residual)
      - y = -0.85x + 4.17
      - (0.18)* (0.44)*
      - R² = 0.21, N = 83
    - Regression 3: EMEs and LICs only
      - y = -0.77x + 3.99
      - (0.24)*   (0.53)*
      - R² = 0.13, N = 73
  - Note: Higher values of the fiscal transparency index denote greater fiscal transparency. Absolute values of fixed effects (percent of GDP) used as dependent variable.
- Composition of debt increases by transparency group (1980–2010):
  - Countries with above average fiscal transparency show a significantly smaller contribution of stock-flow adjustments to increases in debt than countries with below average fiscal transparency.
  - This holds for both advanced economies and emerging and low-income economies.
- Caution on causality:
  - While greater transparency correlates with lower stock-flow adjustments and lower fixed effects, causation could run in either direction: less incentive to conceal may lead to greater transparency, or greater transparency may reduce scope for disguise.

### VI. CONCLUSION
- Over 1980–2010 there have been many episodes of large discrepancies between annual change in gross debt and the budget deficit (stock-flow adjustments).
- Stock-flow adjustments were often positive and persistent; public debt stocks in many countries are higher than accumulated deficits imply.
- Some stock-flow adjustments have legitimate accounting explanations, but:
  - Significant unexplained differences exist across countries that reflect country-specific characteristics.
  - These country-specific factors tend to be higher in countries with below average fiscal transparency.
  - Suggests a lack of fiscal transparency may make it easier for governments to engage in deceptive fiscal stratagems.

### APPENDIX A. DATA SOURCES (selected entries)
- Data span 1980 to 2010 (based on availability). Calendar year general government data from WEO.
- Key source list (as appearing in table):
  - Overall Fiscal Balance: IMF World Economic Outlook (WEO), June 2011
  - Gross Debt: IMF World Economic Outlook (WEO), June 2011
  - Net Debt: IMF World Economic Outlook (WEO), June 2011
  - Nominal GDP: IMF World Economic Outlook (WEO), June 2011
  - Net Interest Payments: IMF World Economic Outlook (WEO), June 2011
  - Primary Balance: IMF World Economic Outlook (WEO), June 2011
  - Inflation: IMF World Economic Outlook (WEO), June 2011
  - Numerical Budget balance rule: Fiscal Rules database by the IMF’s Fiscal Affairs Department; Fiscal Policy and Surveillance Division (2009)
  - Real Effective Exchange Rate: IFS
  - Public sector debt denoted in foreign currency – Advanced Economies: OECD
  - Public sector debt denoted in foreign currency – Emerging and Low-Income Economies: World Bank Global Development Finance Database
  - Debt Forgiveness or Reduction: World Bank Global Development Finance Database
  - Banking Crisis dummy and Fiscal Costs of Banking Crisis: IMF Financial Crisis Episodes Database (Laeven and Valencia, 2010)
  - Budget Institutions Index – Transparency Component: Dabla-Norris et al. (2010)
  - Fiscal Transparency ROSC Database: IMF Fiscal Transparency Report on Observance of Standards and Codes (ROSC)

*Italic: Source — Country authorities; IMF staff estimates and calculations as presented in the content unit.*

### REFERENCES

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### References

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