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Can Econometrics Improve Economic Forecasting?

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  • David F. Hendry
  • Michael P. Clements

Abstract

After reviewing the history of analyses of economic forecasting, the role of econometrics in improving economic forecasting is considered, building on CLEMENTS and HENDRY (1994a). The basis of the analysis is a world where model selection is difficult, no model coincides with the economic mechanism, and that mechanism is both non-stationary and evolves over time. On the constructive side, econometric analysis suggests ways of reducing each of the resulting five sources of forecast uncertainty (parameter non-constancy; estimation uncertainty; variable uncertainty; innovation uncertainty; and model mis-specification). On the critical side, the lack of invariance of forecast evaluation procedures to the representation of the model may camouflage inadequate models. We show that forecasts generated from vector autoregressions in differences may be more robust to certain forms of structural change over the forecast period, and that a similar result can be achieved by suitable forms of intercept corrections in vector error-correction mechanisms.

Suggested Citation

  • David F. Hendry & Michael P. Clements, 1994. "Can Econometrics Improve Economic Forecasting?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 130(III), pages 267-298, September.
    • Handle: RePEc:ses:arsjes:1994-iii-2
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    Cited by:

    1. Chadha, J.S. & Schellekens, P., 1998. "Utility functions for central bankers: the not so drastic quadratic," Discussion Paper Series In Economics And Econometrics 9818, Economics Division, School of Social Sciences, University of Southampton.
    2. Ulph, A., 1993. "Environmental policy and international trade when governments and producers act strategically," Discussion Paper Series In Economics And Econometrics 9318, Economics Division, School of Social Sciences, University of Southampton.
    3. Aldrich, J., 1992. "Haavelmo's Identification Theory," Discussion Paper Series In Economics And Econometrics 9218, Economics Division, School of Social Sciences, University of Southampton.
    4. Ulph, A., 1997. "Political institutions and the design of environmental policy in a federal system with asymmetric information," Discussion Paper Series In Economics And Econometrics 9718, Economics Division, School of Social Sciences, University of Southampton.
    5. Ulph, A., 1995. "International environmental regulation when national governments act strategically," Discussion Paper Series In Economics And Econometrics 9518, Economics Division, School of Social Sciences, University of Southampton.
    6. Qizilbash, M., 1994. "Bribery, efficiency wages and political protection," Discussion Paper Series In Economics And Econometrics 9418, Economics Division, School of Social Sciences, University of Southampton.
    7. Elbadawi, Ibrahim A & Soto, Raimundo, 1997. "Real Exchange Rates and Macroeconomic Adjustment in Sub-Saharan Africa and Other Developing Countries," Journal of African Economies, Centre for the Study of African Economies, vol. 6(3), pages 74-120, Supplemen.
    8. Cook, S., 1996. "Econometric methodology I," Discussion Paper Series In Economics And Econometrics 9618, Economics Division, School of Social Sciences, University of Southampton.
    9. 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.

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