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Testing the Rationality of State Revenue Forecasts

  • Daniel R. Feenberg
  • William Gentry
  • David Gilroy
  • Harvey S. Rosen

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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File URL: http://www.nber.org/papers/w2628.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2628.

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Date of creation: Jun 1988
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Publication status: published as Review of Economics and Statistics, Vol. LXXI, No. 2, pp. 300-308, (May 1989).
Handle: RePEc:nbr:nberwo:2628
Note: PE
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  1. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
  2. John H. Kareken, 1983. "Deposit insurance reform or deregulation is the cart, not the horse," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  3. 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.
  4. 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.
  5. Jonathan S. Leonard, 1980. "Wage Expectations in the Labor Market: Survey Evidence on Rationality," NBER Working Papers 0440, National Bureau of Economic Research, Inc.
  6. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
  7. 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.
  8. B. Douglas Bernheim, 1989. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Chapters, in: The Economics of Aging, pages 335-358 National Bureau of Economic Research, Inc.
  9. 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.
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