Testing the Rationality of State Revenue Forecasts

35 Pages Posted: 4 Jul 2004 Last revised: 8 Mar 2021

See all articles by Daniel R. Feenberg

Daniel R. Feenberg

National Bureau of Economic Research (NBER)

William M. Gentry

Williams College - Department of Economics

David Gilroy

Independent

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 1988

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.

Suggested Citation

Feenberg, Daniel R. and Gentry, William M. and Gilroy, David and Rosen, Harvey S., Testing the Rationality of State Revenue Forecasts (June 1988). NBER Working Paper No. w2628, Available at SSRN: https://ssrn.com/abstract=439564

Daniel R. Feenberg (Contact Author)

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William M. Gentry

Williams College - Department of Economics ( email )

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David Gilroy

Independent

Harvey S. Rosen

Princeton University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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