Accuracy and rationality of state General Fund Revenue forecasts: Evidence from panel data

Using a new panel data set, this paper employs a random effects model to investigate the determinants of General Fund Revenue forecast errors of state Legislative Fiscal offices. Employing exclusively judgmental methods increases the forecast error. The use of cross-sectional data, in addition to time-series, increases the accuracy. The forecast error is not influenced by the existence of a dominant political party or the existence of another official forecast. If the forecasts are obtained less frequently than monthly or bi-monthly, forecast errors become smaller. Grants from federal government have a small worsening effect. If the predictions of the national (state) economic trends that are used in forecasting are obtained from the state government, forecasts become less (more) accurate. The forecasts are free of systematic under or over-prediction, but they can be improved by using available information more efficiently