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Forecast Failure, Expectations Formation, and the Lucas Critique

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Since 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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File URL: http://www.nuff.ox.ac.uk/economics/papers/2002/w8/FFlucas.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2002-W8.

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Length: 15 pages
Date of creation: 13 Mar 2000
Date of revision:
Handle: RePEc:nuf:econwp:0208

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Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Wallis, Kenneth F, 1993. "Comparing Macroeconometric Models: A Review Article," Economica, London School of Economics and Political Science, vol. 60(238), pages 225-37, May.
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  5. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
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  10. Fildes, Robert, 1992. "The evaluation of extrapolative forecasting methods," International Journal of Forecasting, Elsevier, vol. 8(1), pages 81-98, June.
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  12. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, December.
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  15. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct.
  16. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
  17. David Hendry, 2000. "A General Forecast-error Taxonomy," Econometric Society World Congress 2000 Contributed Papers 0608, Econometric Society.
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Cited by:
  1. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.
  2. Neil R. Ericsson, 2000. "Predictable uncertainty in economic forecasting," International Finance Discussion Papers 695, Board of Governors of the Federal Reserve System (U.S.).

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