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Forecasting in the Presence of Structural Breaks and Policy Regime Shifts

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Abstract

The value of selecting the best forecasting model as the basis for empirical economic policy analysis is questioned. When no model coincides with the data generation process, non-causal statistical devices may provide the best available forecasts: examples from recent work include intercept corrections and differenced-data VARs. However, the resulting models need have no policy implications. A 'paradox' may result if their forecasts induce policy changes which can be used to improve the statistical forecast. This suggests correcting statistical forecasts by using the econometric model's estimate of the 'scenario' change, and doing so yields reduced biases.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2002/w12/DFHGEMTom.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2002-W12.

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Length: 20 pages
Date of creation: 11 Sep 2001
Date of revision:
Handle: RePEc:nuf:econwp:0212

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

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Cited by:
  1. Andrew B. Martinez, 2011. "Comparing Government Forecasts of the United States’ Gross Federal Debt," Working Papers 2011-002, The George Washington University, Department of Economics, Research Program on Forecasting.

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