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Forecasting in the Presence of Structural Breaks and Policy Regime Shifts

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  • David Hendry
  • Grayham Mizon

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 models estimate of the scenario change, and doing so yields reduced biases.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2002-W12.

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Date of creation: 01 Sep 2001
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Handle: RePEc:oxf:wpaper:2002-w12

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  1. Clive W. J. Granger & Melinda Deutsch, 1991. "Comments on the evaluation of policy models," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 413, Board of Governors of the Federal Reserve System (U.S.).
  2. James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
  3. Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, Elsevier, vol. 90(2), pages 265-289, June.
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  6. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 12(5), pages 533-72, December.
  7. Holden,Ken & Peel,David A. & Thompson,John L., 1991. "Economic Forecasting," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521356923.
  8. Banerjee, Anindya & Hendry, David F & Mizon, Grayham E, 1996. "The Econometric Analysis of Economic Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 573-600, November.
  9. Hendry, David F & Doornik, Jurgen A, 1997. "The Implications for Econometric Modelling of Forecast Failure," Scottish Journal of Political Economy, Scottish Economic Society, vol. 44(4), pages 437-61, September.
  10. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct.
  11. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 833-881, May.
  12. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  13. Bontemps, Christophe & Mizon, Grayham E., 2001. "Congruence and encompassing," Discussion Paper Series In Economics And Econometrics 0107, Economics Division, School of Social Sciences, University of Southampton.
  14. Hendry, David F., 2000. "On detectable and non-detectable structural change," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 11(1-2), pages 45-65, July.
  15. Hendry, D.F. & Mizon, G.E., 1999. "On selecting policy analysis models by forecast accuracy," Discussion Paper Series In Economics And Econometrics 9918, Economics Division, School of Social Sciences, University of Southampton.
  16. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262531895, December.
  17. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  18. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  19. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198283164, October.
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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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