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Testing The Rationality Of State Revenue Forecasts

  • FEENBERG, D.R.
  • GENTRY, W.
  • GILROY, D.
  • ROSEN, H.S.

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.

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Paper provided by Princeton, Woodrow Wilson School - Discussion Paper in its series Papers with number 16.

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Length: 33 pages
Date of creation: 1988
Date of revision:
Handle: RePEc:fth:priwdp:16
Contact details of provider: Postal: PRINCETON UNIVERSITY, WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, DEPARTMENT OF ECONOMICS, PRINCETON NEW-JERSEY 08542 U.S.A.
Phone: (609) 258-4800
Web page: http://www.wws.princeton.edu/
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  1. Jonathan S. Leonard, 1980. "Wage Expectations in the Labor Market: Survey Evidence on Rationality," NBER Working Papers 0440, National Bureau of Economic Research, Inc.
  2. N. Gregory Mankiw & Matthew D. Shapiro, 1986. "News or Noise? An Analysis of GNP Revisions," NBER Working Papers 1939, National Bureau of Economic Research, Inc.
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  4. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
  5. B. Douglas Bernheim, 1987. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Working Papers 2291, National Bureau of Economic Research, Inc.
  6. Robert B. Litterman & Thomas M. Supel, 1983. "Using vector autoregressions to measure the uncertainty in Minnesota's revenue forecasts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  7. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
  8. Brown, Bryan W & Maital, Shlomo, 1981. "What Do Economists Know? An Empirical Study of Experts' Expectations," Econometrica, Econometric Society, vol. 49(2), pages 491-504, March.
  9. John H. Kareken, 1983. "Deposit insurance reform or deregulation is the cart, not the horse," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
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