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Forecast Failure, Expectations Formation and the Lucas Critique

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  • David F. Hendry

Abstract

Since forecast failure is due to unanticipated location shifts, 'sensible' agents should adopt 'robust forecasting rules'. In such a non-stationary world, causal variables can dominate non-causal in forecasting, so 'rational expectations' do not have a sound basis: agents cannot know how all relevant information enters the data density at every point in time. Although econometric models 'break down' intermittently, that is not due to the Lucas critique and need not preclude policy analyses.

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  • David F. Hendry, 2002. "Forecast Failure, Expectations Formation and the Lucas Critique," Annals of Economics and Statistics, GENES, issue 67-68, pages 21-40.
    • Handle: RePEc:adr:anecst:y:2002:i:67-68:p:21-40
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    Cited by:

    1. Karimova, Amira & Simsek, Esra & Orhan, Mehmet, 2020. "Policy implications of the Lucas Critique empirically tested along the global financial crisis," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 153-172.
    2. Neil R. Ericsson, 2000. "Predictable uncertainty in economic forecasting," International Finance Discussion Papers 695, Board of Governors of the Federal Reserve System (U.S.).
    3. Angel Asensio, 2013. "Teaching Keynes’s theory to neoclassically formed minds," Chapters, in: Jesper Jespersen & Mogens Ove Madsen (ed.), Teaching Post Keynesian Economics, chapter 10, pages 163-186, Edward Elgar Publishing.
    4. Olson, Eric & Wohar, Mark E., 2016. "An evaluation of ECB policy in the Euro's big four," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 203-213.
    5. Hendry, David F. & Mizon, Grayham E., 2001. "Reformulating empirical macro-econometric modelling," Discussion Paper Series In Economics And Econometrics 104, Economics Division, School of Social Sciences, University of Southampton.
    6. Destefanis, Sergio & Fragetta, Matteo & Gasteiger, Emanuel, 2021. "Does one size fit all in the Euro Area? Some counterfactual evidence," ECON WPS - Working Papers in Economic Theory and Policy 05/2019, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit, revised 2021.
    7. Angel Asensio, 2008. "The growing evidence of Keynes's methodology advantage and its consequences within the four macro-markets framework," Post-Print halshs-00189221, HAL.
    8. Angel Asensio, 2012. "On Keynes’s Seminal Innovation and Related Essential Features: Revisiting the Notion of Equilibrium in The General Theory," Chapters, in: Thomas Cate (ed.), Keynes’s General Theory, chapter 1, Edward Elgar Publishing.
    9. Ajit Karnik & Cedwyn Fernandes, 2009. "Natural resource dependence: a macroeconometric model for the United Arab Emirates," Applied Economics, Taylor & Francis Journals, vol. 41(9), pages 1157-1174.

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