Forecast Bias in Latin American Medium-Term Fiscal Frameworks: Evidence from Chile, Colombia, Peru, and Uruguay
This paper analyzes medium-term fiscal frameworks in Chile, Colombia, Peru, and Uruguay, finding that all four countries exhibit recurrent and significant overestimation biases in their GDP growth forecasts, which undermines the reliability of fiscal baselines and complicates compliance with fiscal rules.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Every government that manages a national economy faces a fundamental challenge: it must decide how much to spend and how much to collect in taxes years before the money is actually needed. To make these long-term plans, officials rely on forecasts, which are educated guesses about how fast the economy will grow in the coming years. These predictions are not just numbers on a spreadsheet; they form the foundation of a country's budget. If a government expects the economy to grow quickly, it feels confident spending more today, assuming that future tax revenues will cover the bill. If the guess is wrong, the entire financial plan can unravel, leading to unexpected debt or cuts in essential services. For this reason, the accuracy of these economic forecasts is a matter of public trust. When officials publish a multi-year outlook, they are making a promise to their citizens and markets that their assumptions are realistic. If those assumptions are consistently too optimistic, the promise becomes a lie, and the discipline intended to keep the economy stable begins to erode.
A recent study by economists Javier Torres and Manuel Arriola-Montenegro investigates whether this optimism is a problem in four Latin American nations: Chile, Colombia, Peru, and Uruguay. These countries have established official documents, known as medium-term fiscal frameworks, which lay out their economic projections for the next three to four years. The researchers wanted to know if the people writing these reports were telling the truth about the future. They gathered a massive collection of these official forecasts, stretching back over two decades, and compared the predictions made at the time against what actually happened to the economy. By looking at the difference between what was predicted and what was realized, the team could see if the forecasts were unbiased—meaning they were just as likely to be too high as too low—or if they were systematically skewed in one direction.
The analysis revealed a clear and troubling pattern that changed over time. For a period in the early years of these frameworks, the forecasts in some countries were surprisingly accurate, or even slightly too cautious. However, the researchers found that this behavior shifted dramatically around the early 2010s. From that point forward, every single country in the study began to consistently overestimate how fast their economies would grow. It was not a case of occasional mistakes or bad luck; the data showed a persistent, structural tendency to be too optimistic. In the years following this shift, the official predictions were consistently higher than reality by a significant margin. For Peru, the forecasts were too high by roughly two and a half percentage points per year. In Uruguay, the overestimation was close to two percentage points. Colombia and Chile showed similar trends, with their predictions overshooting actual growth by about one and a half percentage points annually.
To understand the scale of this error, imagine a runner who is told they will finish a race in ten minutes, but they consistently finish in twelve. If the runner's coach plans the training schedule based on the ten-minute expectation, the runner will be exhausted and unprepared for the reality. In the same way, when a government plans its budget based on a growth rate that is two percentage points higher than what actually occurs, it is planning for a richer future than the one that arrives. The study found that this gap was not a temporary glitch but a sustained regime that has lasted for more than a decade. The researchers noted that this shift coincided with the end of a global commodity boom, suggesting that the countries may have been slow to adjust their long-term expectations when the economic winds changed. They continued to use the growth rates from the boom years even as the economy began to slow down, leading to a decade of overly rosy projections.
The consequences of this bias extend far beyond a simple statistical error. Because these forecasts are the anchor for fiscal rules—the laws that limit how much a country can spend or borrow—a systematic overestimation of growth effectively loosens these rules without anyone noticing. If a country expects to grow faster than it actually does, it will spend more money than it can afford, believing that future taxes will cover the difference. When the future arrives and the money is not there, the country is left with a larger deficit or higher debt than intended. The study concludes that this persistent optimism weakens the credibility of the entire budgeting process. It suggests that for these four nations, the very tools designed to ensure fiscal discipline have been undermined by the assumptions feeding them. The authors argue that to restore trust, these frameworks need regular, independent checks to ensure that the numbers used to plan the nation's future are grounded in reality, rather than in the hope of a boom that has already passed.
Drowning in papers in your field?
Get daily digests of the most novel papers matching your research keywords — with technical summaries, in your language.