Working Paper: NBER ID: w2628
Authors: Daniel R. Feenberg; William Gentry; David Gilroy; Harvey S. Rosen
Abstract: In recent months, the governors of several states have suffered major political embarrassments because actual revenues fell, substantially short of the predictions in their respective budgets. Such episodes focus attention on the question of whether states do a "good" job of forecasting revenues. In modern economics, forecasts are evaluated on the basis of whether or not they are "rational" -- do the forecasts optimally incorporate all information that is available at the tune they are made? This paper develops a method for testing the rationality of state revenue forecasts, and applies it to the analysis of data from New Jersey, Massachusetts, arid Maryland. One of our main findings is that in all three states, the forecasts of own revenues are systematically biased downward.
Keywords: State Revenue Forecasts; Rational Expectations; Public Finance
JEL Codes: H62; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Forecasts of state revenues (H68) | Actual year-to-year percent increases in own revenues (O49) |
| Forecasts for federal grants (H68) | Actual growth of federal grants (H77) |
| Forecast accuracy over time (C53) | Forecasting bias (C53) |