Fiscal Forecasting Rationality Among Expert Forecasters

Abstract

Macroeconomic theories attribute rigidities in expectations formation to two mechanisms: sticky or noisy information. Recent advances in testing time variations in forecast dispersion—using the fluctuation rationality test—allow detecting departures from forecaster rationality over time. Relating individual forecaster behavior to economic or political factors on a panel of budget balance forecasts from Consensus Economics, a large panel of individual expert forecasters in four major OECD countries between 1993 to 2023, we find evidence for forecaster behavior in line with noisy information. Traditional full-sample tests show that forecasters are not rational, but this is due to an overly pessimistic reaction to sudden big shifts, like the global financial crisis or the pandemic. In normal times, forecasters do systematically incorporate economic and political news in budget forecast revisions.

Macroeconomic theories attribute rigidities in expectations formation to two mechanisms: sticky or noisy information. Recent advances in testing time variations in forecast dispersion—using the fluctuation rationality test—allow detecting departures from forecaster rationality over time. Relating individual forecaster behavior to economic or political factors on a panel of budget balance forecasts from Consensus Economics, a large panel of individual expert forecasters in four major OECD countries between 1993 to 2023, we find evidence for forecaster behavior in line with noisy information. Traditional full-sample tests show that forecasters are not rational, but this is due to an overly pessimistic reaction to sudden big shifts, like the global financial crisis or the pandemic. In normal times, forecasters do systematically incorporate economic and political news in budget forecast revisions.