## Authorities’ Fiscal Forecasts in Latin America: Are They Optimistic?

_IMF Working Papers, June 4, 2021_

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## Bibliographic details
- Authors: Metodij Hadzi-Vaskov, Luca A Ricci, Alejandro M. Werner, Rene Zamarripa
- Published: June 4, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513573403.001

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### Overview
- Authors: Metodij Hadzi-Vaskov, Luca A Ricci, Alejandro M. Werner, Rene Zamarripa
- Date: June 4, 2021
- Scope: Six Latin American economies using annual budget documents over the period 2000-2018.
- Research question: Do governments in Latin America tend to be optimistic when preparing budgetary projections?

### Methodology
- Constructed a novel dataset of the authorities’ fiscal forecasts in six Latin American economies using data from annual budget documents over the period 2000-2018.
- Compared authorities’ forecasts with outturns reported in the corresponding budget documents of the following years to measure fiscal forecast errors and their evolution.

### Key Findings
- For most countries, there is no general optimistic bias in the forecasts for the fiscal balance-to-GDP ratio (though there may be bias for the components).
- Fiscal forecasts have improved for some countries over time, albeit they have worsened for others.
- Forecast errors for public debt-to-GDP ratios are negatively associated with surprises to GDP growth.
- Budget balance rules seem to help contain the size of the fiscal forecast errors.

### Drivers of Forecast Errors
- Forecast errors for the fiscal balance-to-GDP ratio are:
  - Positively correlated with GDP growth.
  - Positively correlated with terms of trade changes.
  - Negatively correlated with GDP deflator surprises.
- Forecast errors for public debt-to-GDP ratios are negatively associated with surprises to GDP growth.

### Policy Implications and Interpretation
- Presence of budget balance rules is associated with smaller fiscal forecast errors, suggesting fiscal rules can improve forecast accuracy or constrain error magnitude.
- Heterogeneity across countries indicates that institutional settings and components of forecasts (revenues, expenditures, debt) matter for the presence and direction of bias.
- Improving forecasting practices could focus on better accounting for GDP growth volatility, terms of trade shifts, and GDP deflator surprises.

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_Source: https://www.imf.org/en/publications/wp/issues/2021/06/04/authorities-fiscal-forecast-in-latin-america-are-they-optimistic-50223_