DP16108 Worse Than You Think: Public Debt Forecast Errors in Advanced and Developing Economies

Author(s): Julia Estefania Flores, Davide Furceri, Siddharth Kothari, Jonathan D. Ostry
Publication Date: May 2021
Keyword(s): Forecast Errors, public debt
JEL(s): H63, H68
Programme Areas: Public Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16108

We compile a unique dataset of medium-term public debt forecasts for an unbalanced panel of 174 countries, based on IMF (for the period 1995â??2020) and Economist Intelligence Unit (2007â??20) projections. We find that on average: (i) there is a positive forecast error (FE) in the debt-to-GDP projections-that is, realized debt ratios are larger than forecasts; (ii) the FE increases with the projection horizon and is statistically significant and large-about 10 percent of GDP at the five-year horizon; (iii) the magnitude is similar between advanced (AEs) and emerging markets and developing economies (EMDEs), and in EMDEs is present irrespective of recessions while for AEs is associated with surprise recessions in the forecast horizon; (iv) FEs are not statistically different between IMF program and non-program cases; (v) positive FEs are only partly attributable to optimism about growth; and (vi) oil-exporters and more volatile countries tend to have larger FEs. If FEs following the COVID crisis are in line with those that followed the Global Financial Crisis, average debt ratios in EMDEs would increase to close to 73 percent of GDP by 2025 instead of declining to 63 percent of GDP as currently forecast.