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Reformulating empirical macro-econometric modelling

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  • Hendry, David F.
  • Mizon, Grayham E.

Abstract

The policy implications of estimated macro-econometric systems depend on the formulations of their equations, the methodology of empirical model selection and evaluation, the techniques of policy analysis, and their forecast performance. Drawing on recent results in the theory of forecasting, we question the role of `rational expectations'; criticize a common approach to testing economic theories; show that impulse-response methods of evaluating policy are seriously flawed; and question the mechanistic derivation of forecasts from econometric systems. In their place, we propose that expectations should be treated as instrumental to agents' decisions; discuss a powerful new approach to the empirical modelling of econometric relationships; offer viable alternatives to studying policy implications; and note modifications to forecasting devices that can enhance their robustness to unanticipated structural breaks. Keywords; economic policy analysis, macro-econometric systems, empirical model selection and evaluation, forecasting, rational expectations, impulse-response analysis, structural breaks

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0104.

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Date of creation: 01 Jan 2001
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Handle: RePEc:stn:sotoec:0104

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  1. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report, Federal Reserve Bank of Minneapolis 107, Federal Reserve Bank of Minneapolis.
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  8. Hendry, David F & Doornik, Jurgen A, 1997. "The Implications for Econometric Modelling of Forecast Failure," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 44(4), pages 437-61, September.
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  16. Michael P. Clements & David F. Hendry, 1999. "On winning forecasting competitions in economics," Spanish Economic Review, Springer, Springer, vol. 1(2), pages 123-160.
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  25. Banerjee, Anindya & Hendry, David F, 1992. "Testing Integration and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 54(3), pages 225-55, August.
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  28. 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.
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Cited by:
  1. David Hendry & Michael P. Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Papers 2002-W11, Economics Group, Nuffield College, University of Oxford.
  2. Hans-Martin Krolzig & Massimiliano Marcellino & Grayham E. Mizon, . "A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market," Working Papers 185, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Hans-Martin Krolzig, 2003. "General-to-Specific Model Selection Procedures for Structural Vector Autoregressions," Economics Papers 2003-W15, Economics Group, Nuffield College, University of Oxford.

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