Reformulating Empirical Macroeconomic Modelling

David Hendry and Grayham Mizon

Oxford Review of Economic Policy, 2000, vol. 16, issue 4, 138-59

Abstract: The policy implications of estimated macro-econometric systems depend on the formulations of their equations, the methodology of empirical model selection and evaluation, the techniques of policy analysis, and their forecast performance. Drawing on recent results in the theory of forecasting, we question the role of "rational expectations"; criticize a common approach to testing economic theories; show that impulse-response methods of evaluating policy are seriously flawed; and question the mechanistic derivation of forecasts from econometric systems. In their place, we propose that expectations should be treated as instrumental to agents' decisions; discuss a powerful new approach to the empirical modelling of econometric relationships; offer viable alternatives to studying policy implications; and note modifications to forecasting devices that can enhance their robustness to unanticipated structural breaks. Copyright 2000 by Oxford University Press.

Date: 2000
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