Forecasting in the Presence of Structural Breaks and Policy Regime Shifts
AbstractThe 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 models estimate of the scenario change, and doing so yields reduced biases.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2002-W12.
Date of creation: 01 Sep 2001
Date of revision:
Other versions of this item:
- David Hendry & Grayham E. Mizon, 2001. "Forecasting in the Presence of Structural Breaks and Policy Regime Shifts," Economics Papers 2002-W12, Economics Group, Nuffield College, University of Oxford.
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