UNSPECIFIED (1996) Intercept corrections and structural change. JOURNAL OF APPLIED ECONOMETRICS, 11 (5). pp. 475-494. ISSN 0883-7252

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Abstract

Analyses of forecasting that assume a constant, time-invariant data generating process (DGP), and so implicitly rule out structural change or regime shifts in the economy, ignore an aspect of the real world responsible for some of the more dramatic historical episodes of predictive failure. Some models may offer greater protection against unforeseen structural breaks than others, and various tricks may be employed to robustify forecasts to change. We show that in certain states of nature, vector autoregressions in the differences of the variables (in the spirit of Box-Jenkins time-series modelling), can outperform vector 'equilibrium-correction' mechanisms. However, appropriate intercept corrections can enhance the performance of the latter, albeit that reductions in forecast bias may only be achieved at the cost of inflated forecast error variances.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences
Journal or Publication Title:	JOURNAL OF APPLIED ECONOMETRICS
Publisher:	JOHN WILEY & SONS LTD
ISSN:	0883-7252
Date:	September 1996
Volume:	11
Number:	5
Number of Pages:	20
Page Range:	pp. 475-494
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/18269

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