Evaluating a Model by Forecast Performance

Although out-of-sample forecast performance is often deemed to be the 'gold standard' of evaluation, it is not in fact a good yardstick for evaluating models in general. The arguments are illustrated with reference to a recent paper by Carruth, Hooker and Oswald ["Review of Economics and Statistics" (1998), Vol. 80, pp. 621-628], who suggest that the good dynamic forecasts of their model support the efficiency-wage theory on which it is based. Copyright 2005 Blackwell Publishing Ltd.