| Sumari: | 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.
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