On Selecting Policy Analysis Models by Forecast Accuracy

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On Selecting Policy Analysis Models by Forecast Accuracy

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Hendry, D.F.
Mizon, G.E.

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David F. Hendry

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 Â‘paradoxÂ’ 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 modelÂ’s estimate of the Â‘scenarioÂ’ change. An application to UK consumers expenditure illustrates the analysis.

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9918.

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Date of creation: 01 Jan 1999
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Handle: RePEc:stn:sotoec:9918

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P.J.G. Vlaar & A.H.J. den Reijer, 2003. "Forecasting inflation: An art as well as a science!," DNB Staff Reports (discontinued) 107, Netherlands Central Bank. [Downloadable!]
Other versions:
- Peter Vlaar & Ard den Reijer, 2004. "Forecasting inflation: An art as well as a science!," Computing in Economics and Finance 2004 148, Society for Computational Economics. [Downloadable!]
- Ard Reijer & Peter Vlaar, 2006. "Forecasting Inflation: An Art as Well as a Science!," De Economist, Springer, vol. 154(1), pages 19-40, 03. [Downloadable!] (restricted)
David Hendry & Michael P. Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Papers 2002-W11, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
Other versions:
- Hendry, David F & Michael P. Clements, 2002. "Economic Forecasting: Some Lessons from Recent Research," Royal Economic Society Annual Conference 2002 99, Royal Economic Society. [Downloadable!]
- David Hendry & Michael Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Series Working Papers 078, University of Oxford, Department of Economics. [Downloadable!]
- David F. Hendry & Michael P. Clements, 2001. "Economic forecasting: some lessons from recent research," Working Paper Series 082, European Central Bank. [Downloadable!]
- Hendry, David F. & Clements, Michael P., 2003. "Economic forecasting: some lessons from recent research," Economic Modelling, Elsevier, vol. 20(2), pages 301-329, March. [Downloadable!] (restricted)
Massimiliano Marcellino & Grayham E. Mizon, 2000. "Wages, Prices, Productivity, Inflation and Unemployment in Italy 1970-1994," Econometric Society World Congress 2000 Contributed Papers 0911, Econometric Society. [Downloadable!]
David Hendry, 2000. "A General Forecast-error Taxonomy," Econometric Society World Congress 2000 Contributed Papers 0608, Econometric Society. [Downloadable!]
Massimiliano Marcellino & Grayham E. Mizon, . "Small system modelling of real wages, inflation, unemployment and output per capita in Italy 1970-1994," Working Papers 188, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
Other versions:
- Marcellino, M. & Mizon, G.E., 2001. "Small system modelling of real wages, inflation, unemployment and output per capita in Italy 1970-1994," Discussion Paper Series In Economics And Econometrics 0106, Economics Division, School of Social Sciences, University of Southampton.
- Massimiliano Marcellino & Grayham E. Mizon, 2001. "Small-system modelling of real wages, inflation, unemployment and output per capita in Italy 1970-1994," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 359-370. [Downloadable!]
Friedrich Fritzer & Gabriel Moser & Johann Scharler, 2002. "Forecasting Austrian HICP and its Components using VAR and ARIMA Models," Working Papers 73, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
David Hendry, 2000. "Forecast Failure, Expectations Formation, and the Lucas Critique," Economics Papers 2002-W8, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
Other versions:
- David F. Hendry, 2002. "Forecast Failure, Expectations Formation and the Lucas Critique," Annales d'Economie et de Statistique, ADRES, issue 67-68, pages 02, Juillet-D. [Downloadable!]
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. [Downloadable!]
A.H.J. den Reijer & P.J.G. Vlaar, 2003. "Forecasting Inflation in the Netherlands and the Euro Area," WO Research Memoranda (discontinued) 723, Netherlands Central Bank, Research Department. [Downloadable!]

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