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On selecting policy analysis models by forecast accuracy

On selecting policy analysis models by forecast accuracy,David F. Hendry,Grayham E. Mizon

On selecting policy analysis models by forecast accuracy   (Citations: 13)
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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 ‘paradox’ 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 model’s estimate of the ‘scenario’ change. An application to UK consumers expenditure illustrates the analysis.
Published in 1999.
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    • ...This argument is indeed apparent in theoretical models, see L ¨ utkepohl (1987) and Hendry and Mizon (1999)...

    A. H. J. den Reijeret al. Forecasting Inflation: An Art as Well as a Science!

    • ...As ever, the issue is rather less clear-cut in practice: forecast failure could, but need not, impugn a policy model; could, but need not, be ‘camouflaged’ by a variety of devices (of which the best know are intercept corrections); and a ‘naive’ model could, but need not, be robust to location shifts which are pernicious for an econometric model (see e.g., Hendry and Mizon, 2000)...

    Michael P. Clementset al. Evaluating a Model by Forecast Performance

    • ...changes. Banerjee, Hendry and Mizon (1996), Hendry and Mizon (2000), and Hendry and Mizon (1998)...

    Massimiliano Marcellinoet al. Small system modelling of real wages, inflation, unemployment and outp...

    • ...structural breaks and regime shifts as in Hendry and Mizon (2000)...
    • ...In particular, as discussed by Hendry and Mizon (2000), if the parameters in (7) and (8) were unconnected, the system would manifest ‘policy ineffectiveness’, in that only deviations of ∆zt from γz would have an impact, with changes in γz having no effect when implemented by keeping ∆zt − γz fixed...
    • ...This was done in Hendry and Mizon (2000) for a similar class of models and so is not repeated here...

    David F. Hendryet al. Forecasting in the Presence of Structural Breaks and Policy Regime Shi...

    • ...With a similar argument, Hendry and Mizon 1999 question the value of selecting the best forecasting model as the basis for empirical policy analysis: ‘since forecast failure often results from factors unrelated to the policy change in question, the econometric model may continue to characterize the response of the economy to the policy, despite its forecast inaccuracy.’...

    F. J. H. Don. Forecasting in Macroeconomics: A Practitioner's View

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