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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Forecasting Exogenous Fiscal Variables in the United States
Darrel Cohen and Glenn Follette

Abstract: This paper provides an introduction to the practice of forecasting "exogenous" components of federal government taxes and spending-policy actions, for short--in the United States. First, we estimate simple models of defense expenditures that are useful for constructing current-quarter forecasts based on incoming daily and monthly spending data. Also, we discuss forecasting policy changes in the context of extending recent empirical work of Alan Auerbach (2002, 2003) on fiscal reaction functions. Forecasts of exogenous fiscal actions are an important input into forecasts of the budget deficit, and we compare the forecasts of the budget deficit prepared by the Congressional Budget Office (CBO), the President's Office of Management and Budget (OMB), and the staff o the Federal Reserve Board (FRB). To our knowledge, analysis of the FRB forecasts has not been done before.

Keywords: Fiscal policy, forecasting, fiscal reaction functions

Full paper (802 KB PDF)

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Last update: December 1, 2003