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Forecast Failure, Expectations Formation and the Lucas Critique

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  • David F. HENDRY

Abstract

Since forecast failure is due to unanticipated location shifts, 'sensible' agents should adopt 'robust forecasting rules'. In such a non-stationary world, causal variables can dominate non-causal in forecasting, so 'rational expectations' do not have a sound basis: agents cannot know how all relevant information enters the data density at every point in time. Although econometric models 'break down' intermittently, that is not due to the Lucas critique and need not preclude policy analyses.

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Bibliographic Info

Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2002)
Issue (Month): 67-68 ()
Pages: 21-40

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Handle: RePEc:adr:anecst:y:2002:i:67-68:p:02

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  1. David Hendry, 2000. "A General Forecast-error Taxonomy," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0608, Econometric Society.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  4. Fildes, Robert, 1992. "The evaluation of extrapolative forecasting methods," International Journal of Forecasting, Elsevier, Elsevier, vol. 8(1), pages 81-98, June.
  5. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(352), pages 661-92, December.
  6. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262531895, December.
  7. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  8. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 506, Board of Governors of the Federal Reserve System (U.S.).
  9. Michael P. Clements & David F. Hendry, 1999. "On winning forecasting competitions in economics," Spanish Economic Review, Springer, Springer, vol. 1(2), pages 123-160.
  10. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521632423.
  11. Wallis, Kenneth F, 1993. "Comparing Macroeconometric Models: A Review Article," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 60(238), pages 225-37, May.
  12. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198283164, October.
  13. Hendry, David F., 2000. "On detectable and non-detectable structural change," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 11(1-2), pages 45-65, July.
  14. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct.
  15. Calzolari, Giorgio, 1981. "A Note on the Variance of Ex-Post Forecasts in Econometric Models," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1593-95, November.
  16. Hendry, D.F. & Mizon, G.E., 1999. "On selecting policy analysis models by forecast accuracy," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 9918, Economics Division, School of Social Sciences, University of Southampton.
  17. Clements, M.P. & Hendry, D., 1992. "On the Limitations of Comparing Mean Square Forecast Errors," Economics Series Working Papers, University of Oxford, Department of Economics 99138, University of Oxford, Department of Economics.
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Cited by:
  1. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers, International Monetary Fund 13/149, International Monetary Fund.
  2. Neil R. Ericsson, 2000. "Predictable uncertainty in economic forecasting," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 695, Board of Governors of the Federal Reserve System (U.S.).

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