The Econometrics of Macroeconomic Forecasting

Abstract

When an econometric model coincides with the mechanism generating the data in an unchanging world, the theory of economic forecasting is reasonably well developed. However, less is known about forecasting when model and mechanism differ in a non‐stationary and changing world. The paper addresses the basic concepts; the invariance of forecast accuracy measures to isomorphic model representations; the roles of causal information, parsimony and collinearity; a reformulated taxonomy of forecast errors; differencing and intercept corrections to robustify forecasts against biases due to shifts in deterministic factors; the removal of structural breaks by co‐breaking; and forecasting using leading indicators.