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Testing the Rationality of State Revenue Forecasts

Daniel R. Feenberg¹; William Gentry²; David Gilroy³; Harvey S. Rosen^1,4,3

¹ National Bureau of Economic Research · ² Williams College · ³ Princeton University · ⁴ Ifo Institute for Economic Research

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 optimal] y incorporate all information that is available at the tune they are made? This paper dr:vel ops a method for testing the rat i.onal t.y of state revenue forecasts, and applies it. to the aria lysi s of data from New Jersey, Massachusetts, arid Maryland. (ne of our main findtri'i; u,; that in all three states, the I orerats of own revenues are yystematically biased dowriward

DOI

10.2307/1926976

Volume

71 (2)

Pages

300

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