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Forecasting non-stationary economic time series. With a foreword by Katarina Juselius. (English) Zbl 0984.62069
Cambridge, MA: MIT Press. xxx, 314 p. (1999).
Publisher’s description: Economies evolve and are subject to sudden shifts precipitated by legislative changes, economic policy, major discoveries, and political turmoil. Macroeconometric models are a very imperfect tool for forecasting this highly complicated and changing process. Ignoring these factors leads to a wide discrepancy between theory and practice.
In their second book on economic forecasting [for the first one from 1998, ‘Forecasting economic time series’, see Zbl 0941.62103] the authors ask why some practices seem to work empirically despite a lack of formal support from theory. After reviewing the conventional approach to economic forecasting, they look at the implications for causal modeling, present a taxonomy of forecast errors, and delineate the sources of forecast failure. They show that forecast-period shifts in deterministic factors – interacting with model misspecification, collinearity, and inconsistent estimation – are the dominant source of systematic failure. They then consider various approaches for avoiding systematic forecasting errors, including intercept corrections, differencing, co-breaking, and modeling regime shifts; they emphasize the distinction between equilibrium correction (based on cointegration) and error correction (automatically offsetting past errors).
Finally, they present three applications to test the implications of their framework. Their results on forecasting have wider implications for the conduct of empirical econometric research, model formulation, the testing of economic hypotheses, and model-based policy analyses.

62M20 Inference from stochastic processes and prediction
62P20 Applications of statistics to economics
62-02 Research exposition (monographs, survey articles) pertaining to statistics
91B84 Economic time series analysis