A General Forecast-error Taxonomy

David Hendry

No 608, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: The paper considers the sources of forecast errors and their consequences in an evolving economy subject to structural breaks,forecasting from mis-specified, data-based models. A model-free taxonomy of forecast errors highlights that deterministic shifts are a major cause of systematic forecast failure. Other sources seem to pose fewer problems. The taxonomy embeds several previous model-based taxonomies for VARs, VECMs, and multi-step estimators, and reveals the stringent requirements that rationality assumptions impose on economic agents.

Date: 2000-08-01
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