Estimating and Forecasting Capital Gains with Quarterly Models: Technical Paper 2004-14

At the end of each year, the Congressional Budget Office (CBO) estimates capital gains for the year ending and forecasts them for the next decade. The decade forecast is made using CBO’s forecast of GDP and an assumption that gains revert from their current size to their historical size relative to GDP. Our objective in this paper is to describe methods to improve CBO’s forecasts, particularly for the first year ahead. We settled on two procedures. The first is similar to CBO’s method for forecasting gains. It uses an equation to forecast gains given forecasts of economic and financial