Forecast Failure, Expectations Formation, and the Lucas Critique
AbstractSince forecast failure is due to unanticipated large shifts in deterministic factors,'sensible' agents should adopt 'robust forecasting rules'. Unless the model coincides with the generating mechanism, one cannot even prove that causal variables will dominate non-causal in forecasting. In such a non-stationary world, 'rational expectations' do not have an epistemologically-sound basis: agents cannot know how all relevant information enters the joint data density at every point in time. Thus, although econometric models 'break down' intermittently when deterministic shifts occur, that is not due to the Lucas critique and need not impugen their value for policy analyses.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2002-W8.
Length: 15 pages
Date of creation: 13 Mar 2000
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Web page: http://www.nuff.ox.ac.uk/economics/
Other versions of this item:
- David F. HENDRY, 2002. "Forecast Failure, Expectations Formation and the Lucas Critique," Annales d'Economie et de Statistique, ENSAE, issue 67-68, pages 21-40.
- 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.
- NEP-ALL-2002-05-03 (All new papers)
- NEP-ECM-2002-05-03 (Econometrics)
- NEP-ETS-2002-05-03 (Econometric Time Series)
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