Robustifying Forecasts from Equilibrium-Correction Models
AbstractIn a non-stationary world subject to structural breaks, where model and mechanism differ, equilibrium-correction models are a risky device from which to forecast. Equilibrium shifts entail systematic forecast failure, and indeed forecasts will tend to move in the opposite direction to the data. A new explanation for the empirical success of second differencing is proposed. We consider model transformations based on additional differencing to reduce forecast-error biases, as usual at some cost in increased forecast-error variances. The analysis is illustrated by an empirical application to narrow money holdings in the UK.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W14.
Length: 30 pages
Date of creation: 01 Apr 2004
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Web page: http://www.nuff.ox.ac.uk/economics/
Other versions of this item:
- David Hendry, 2004. "Robustifying Forecasts from Equilibrium-Correction Models," Economics Series Working Papers 2004-W14, University of Oxford, Department of Economics.
- NEP-ALL-2004-07-11 (All new papers)
- NEP-ECM-2004-07-17 (Econometrics)
- NEP-ETS-2004-07-11 (Econometric Time Series)
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