All change! The implications of non-stationarity for empirical modelling, forecasting and policy

Abstract:

History is littered with forecasts that went badly wrong, a fact sharply illustrated during the recent financial crash and recession. This Oxford Martin policy paper from Professor Sir David Hendry and Dr Felix Pretis examines a fundamental problem in economic forecasting: that many models used in empirical research and for guiding policy have been based on treating observed data, such as unemployment or income levels, as timeless, or ‘stationary’.