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Forecast Failure, Expectations Formation, and the Lucas Critique

  • David Hendry

Since forecast failure is due to unanticipated large shifts in deterministic factors, sensible agents should adopt robust forecasting rules. Unless the model coincides with the generating mechanism, one cannot even prove that causal variables will dominate non-causal in forecasting. In such a non-stationary world, rational expectations do not have an epistemologically- sound basis: agents cannot know how all relevant information enters the joint data density at every point in time. Thus, although econometric models break down intermittently when deterministic shifts occur, that is not due to the Lucas critique and need not impugen their value for policy analyses.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2002/w8/FFlucas.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2002-W08.

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Date of creation: 01 Mar 2000
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Handle: RePEc:oxf:wpaper:2002-w08
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  1. Wallis, Kenneth F, 1993. "Comparing Macroeconometric Models: A Review Article," Economica, London School of Economics and Political Science, vol. 60(238), pages 225-37, May.
  2. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
  3. Calzolari, Giorgio, 1981. "A Note on the Variance of Ex-Post Forecasts in Econometric Models," Econometrica, Econometric Society, vol. 49(6), pages 1593-95, November.
  4. Terence C. Mills (ed.), 1999. "Economic Forecasting," Books, Edward Elgar, volume 0, number 1506, December.
  5. Hendry, David F., 2000. "On detectable and non-detectable structural change," Structural Change and Economic Dynamics, Elsevier, vol. 11(1-2), pages 45-65, July.
  6. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  7. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, June.
  8. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  10. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  11. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
  12. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  13. Clements, M.P. & Hendry, D., 1992. "On the Limitations of Comparing Mean Square Forecast Errors," Economics Series Working Papers 99138, University of Oxford, Department of Economics.
  14. David Hendry, 2000. "A General Forecast-error Taxonomy," Econometric Society World Congress 2000 Contributed Papers 0608, Econometric Society.
  15. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  16. 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.
  17. Fildes, Robert, 1992. "The evaluation of extrapolative forecasting methods," International Journal of Forecasting, Elsevier, vol. 8(1), pages 81-98, June.
  18. repec:cup:cbooks:9780521632423 is not listed on IDEAS
  19. Michael P. Clements & David F. Hendry, 1999. "On winning forecasting competitions in economics," Spanish Economic Review, Springer, vol. 1(2), pages 123-160.
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