The Implications for Econometric Modelling of Forecast Failure.

To reconcile forecast failure with building congruent empirical models, the authors analyze the sources of misprediction. This reveals that an ex ante forecast failure is purely a function of forecast-period events, not determinable from in-sample information. The primary causes are unmodeled shifts in deterministic factors, rather than model misspecification, collinearity, or a lack of parsimony. The authors examine the effects of deterministic breaks on equilibrium-correction mechanisms and consider the role of causal variables. Throughout, Monte Carlo simulation and empirical models illustrate the analysis and support a progressive research strategy based on learning from past failures. Copyright 1997 by Scottish Economic Society.