Abstract:Fiscal rules, such as the Excessive Deficit Procedure and the Stability and Growth Pact (SGP), aim at constraining government behavior. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule. We provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. The tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.

Budget institutions, Fiscal rules, Sovereign risk premia, EMU, Fiscal policy, E43, E62, H61, H62, G12, G15,

Abstract:We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias. Keywords:Risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency JEL-Classification:G12, E43, E62, H6, F34 The reaction of financial markets to this creative accounting is an important policy topic. If financial markets do not price in the de facto deterioration of the fiscal position due to creative accounting, while punishing official deficit data, risk premia could be lowered by shifting deficits to creative accounting. Non-technical summaryThe lower interest rate would provide an incentive to governments to beautify their fiscal data. To our knowledge, no study so far analyzes whether financial markets take note of fiscal window-dressing when pricing government bonds. This is the purpose of our study. In particular, we study whether spreads react, besides official fiscal data, to stock-flow adjustments or to an alternative measure of creative accounting by Koen and van den Noord (2005).Furthermore, we investigate, in how far fiscal transparency affects risk spreads. Kopits and Craig (1998) argue that international financial markets are likely to demand lower premiums from governments that are forthcoming about their fiscal position and risk. The argument is that markets can be more certain about a fiscally transparent government's ability and willingness to service its obligation. A more transparent budget process in addition helps financial markets to detect creative accounting more easily and to assess the true fiscal position of a country. This might increase the spread since more creative accounting becomes known to the markets.We develop a portfolio model of interest differentials based on Bernoth, von Hagen, and Schuknecht (2004). In this model, interest rate differentials increase with a relative worsening of the fiscal position due to an increase in the government's default probability. The model is augmented to account for fiscal creative accounting and fiscal transparency. Creative accounting appearing in the media constitutes a news signal. The more reliable this signal, the greater will be the effect of creative accounting on the expected fiscal position of a country. Creative accounting news should therefore incr...

Despite notable scientific and medical advances, broader political, socioeconomic and behavioural factors continue to undercut the response to the COVID-19 pandemic1,2. Here we convened, as part of this Delphi study, a diverse, multidisciplinary panel of 386 academic, health, non-governmental organization, government and other experts in COVID-19 response from 112 countries and territories to recommend specific actions to end this persistent global threat to public health. The panel developed a set of 41 consensus statements and 57 recommendations to governments, health systems, industry and other key stakeholders across six domains: communication; health systems; vaccination; prevention; treatment and care; and inequities. In the wake of nearly three years of fragmented global and national responses, it is instructive to note that three of the highest-ranked recommendations call for the adoption of whole-of-society and whole-of-government approaches1, while maintaining proven prevention measures using a vaccines-plus approach2 that employs a range of public health and financial support measures to complement vaccination. Other recommendations with at least 99% combined agreement advise governments and other stakeholders to improve communication, rebuild public trust and engage communities3 in the management of pandemic responses. The findings of the study, which have been further endorsed by 184 organizations globally, include points of unanimous agreement, as well as six recommendations with >5% disagreement, that provide health and social policy actions to address inadequacies in the pandemic response and help to bring this public health threat to an end.