Dynamic Scoring

Dynamic scoring predicts the impact of fiscal policy changes by forecasting the effects of economic agents' reactions to incentives created by policy. It is an adaptation of static scoring, the traditional method for analyzing policy changes.

The method yields a more accurate prediction of a policy's impact on a country's fiscal balance and economic output when it can be performed accurately. The potential for heightened accuracy arises from recognition that households and firms will alter their behavior to continue maximizing welfare (households) or profits (firms) under the new policy. Dynamic scoring is more accurate than static scoring when the econometric model correctly captures how households and firms will react to a policy change.

Dynamic scoring is difficult to apply in practice due to the complexity of modeling economic agents' behavior. Economists must infer from economic agents' current behavior how the agents would behave under the new policy. Difficulty increases as the proposed policy becomes increasingly unlike current policy. Likewise, the difficulty of dynamic scoring increases as the time horizon under consideration lengthens. This is due to any model's intrinsic inability to account for unforeseen external shocks in the future.

Further, the reaction to policy changes may not occur quickly, and thus an intrinsic lag in market behavior obscures the real effect of policy changes.