"Robustifying Forecasts from Equilibrium-Correction Models"
	
David F. Hendry
Department of Economics, Oxford University

Abstract: In a non-stationary world subject to structural breaks,
where model and mechanism differ, equilibrium-correction models 
are a risky device from which to forecast. Equilibrium shifts 
entail systematic forecast failure, and indeed forecasts will 
tend to move in the opposite direction to the data. A new 
explanation for the empirical success of second differencing 
is proposed. We consider model transformations based on 
additional differencing to reduce forecast-error biases, 
as usual at some cost in increased forecast-error variances.
The analysis is illustrated by an empirical application to 
narrow money holdings in the UK.