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Policy Analysis, Forediction, and Forecast Failure

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Abstract

Economic policy agencies accompany forecasts with narratives, a combination we call foredictions, often basing policy changes on developments envisaged. Forecast failure need not impugn a forecasting model, although it may, but almost inevitably entails forediction failure and invalidity of the associated policy. Most policy regime changes involve location shifts, which can induce forediction failure unless the policy variable is super exogenous in the policy model. We propose a step-indicator saturation test to check in advance for invariance to policy changes. Systematic forecast failure, or a lack of invariance, previously justified by narratives reveals such stories to be economic fiction.

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  • Jennifer Castle & David Hendry, 2016. "Policy Analysis, Forediction, and Forecast Failure," Economics Series Working Papers 809, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:809
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    More about this item

    Keywords

    Forediction; Invariance; Super exogeneity; Indicator saturation; Co-breaking; Autometrics;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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