Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition

- This study examines the directional accuracy of the CBO, OMB, and SPF forecasts.
- The CBO forecast is a useful indicator of fiscal sustainability conditions at a longer horizon.
- The state of the economy is not associated with directional accuracy.
- Pooling CBO and OMB forecasts might perform better than either CBO or OMB forecasts.

This study evaluates directional accuracy of long-term interest rate and nominal GDP growth forecasts made by the U.S. Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and private forecasters by applying a recently developed market-timing test. This study also investigates whether these forecasts provide useful indicators of the well-known Domar's fiscal sustainability condition and whether directional accuracy differs between ruling parties and the state of the economy. This study finds that the CBO forecast for Domar's condition is useful with a two-year horizon, whereas OMB and private forecasts are only useful with a one-year horizon. The directional accuracy of the forecasts does not differ between expansion and recession.