On the constancy of time-series econometric equations
Parameter constancy is a fundamental requirement for empirical models to be useful for forecasting, analysing economic policy, or testing economic theories. However, there are surprises in defining a constant-parameter model, such that models with time-varying coefficients, and expansion of the para...
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| Format: | Journal article |
| Language: | English |
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Economic & Social Research Institute
1996
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| Summary: | Parameter constancy is a fundamental requirement for empirical models to be useful for forecasting, analysing economic policy, or testing economic theories. However, there are surprises in defining a constant-parameter model, such that models with time-varying coefficients, and expansion of the parameterisation over time are both compatible with constancy, yet unbiased forecasts may not entail a sensible model choice. In-sample tests cannot determine likely post-sample predictive failure. A comparison of two models of UK money demand illustrates the analysis empirically, as one suffers considerable predictive failure yet the other does not, despite being identical in-sample. |
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