Forecast Failure, Expectations Formation and the Lucas Critique
AbstractSince 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 InfoArticle provided by ENSAE in its journal Annals of Economics and Statistics.
Volume (Year): (2002)
Issue (Month): 67-68 ()
Other versions of this item:
- David Hendry, 2000. "Forecast Failure, Expectations Formation, and the Lucas Critique," Economics Papers, Economics Group, Nuffield College, University of Oxford 2002-W8, Economics Group, Nuffield College, University of Oxford.
- David Hendry, 2000. "Forecast Failure, Expectations Formation, and the Lucas Critique," Economics Series Working Papers, University of Oxford, Department of Economics 2002-W08, University of Oxford, Department of Economics.
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