Abstract
This paper analyzes a new fiscal rule and creative accounting using stock-flow adjustments. Previous studies investigate creative accounting using country- or state-level data, although the definitions of creative accounting differ depending on the study. We contribute to the literature on creative accounting by using Japanese municipality data from FY2007 to FY2010, following von Hagen and Wolff (2006). We focus on stock-flow adjustments by considering the relationship between the increase in the change in debt stock and the decrease in the deficit to measure creative accounting. Our contribution is the finding that municipalities engage in stock-flow adjustments by increasing their expenditures and revenues through intergovernmental transfers, which represents creative accounting because it allows municipalities to delay improving their fiscal conditions. To evaluate a new fiscal rule, we should check not only the targeted indexes but also the untargeted indexes, which municipalities do not have an incentive to control.
Highlights
Alesina and Perotti (1996) show that fiscal policy encouraging the issuance of government bonds tends to expand fiscal deficits due to political influences
We identify the causal effects of the new fiscal rule - called ”The Law Relating to the Financial Soundness of Local Governments” [Chiho zaisei kenzenka ho in Japanese] - which focuses on creative accounting and reveals the interdependency of the new fiscal indexes, by applying a seemingly unrelated regression with the difference in differences (SUR-DID) method and using data from FY2007 to FY2010
We analyze whether creative accounting occurred after the introduction of a new fiscal rule in Japanese municipalities
Summary
Alesina and Perotti (1996) show that fiscal policy encouraging the issuance of government bonds tends to expand fiscal deficits due to political influences. The new fiscal rule introduces four fiscal indexes comprising three flow indexes and one stock index These new indexes target the general accounts of each municipality and those of extra-governmental organizations to reveal the true fiscal conditions of all public sector entities. To reveal the true fiscal conditions of each municipality, including extra-governmental organizations, it is necessary to investigate the impacts of the new fiscal rule and determine whether municipalities employ creative accounting through fiscal adjustments or stock-flow adjustments. Some municipalities that suffer from a large former redemption or a low former fiscal balance index might engage in creative accounting under the new fiscal rule For these reasons, in this paper, we combine SUR with the DID method to identify the causal effects and reveal the interdependency of the new fiscal indexes.
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