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date: 19 November 2019

Abstract and Keywords

This article, which proposes a new approach to forecasting breaks by focusing on the role of information, begins by outlining the eight conditions that are necessary to successfully forecast a break. Section 2 then considers the concepts of unpredictability and information to address the first necessary condition. Section 3 separates information into two distinct sets, namely the regular economic forces affecting agents' behavior, and potentially very different information from politics, law, financial innovation, or technology, about events that cause sudden shifts in the regular determinants. Section 4 provides an overview of some potential sources for this second source of information in the context of economics. Having established the potential satisfaction of the first three conditions, Section 5 considers how to formulate a relevant (nonlinear) model class. Section 6 discusses model selection. Section 7 investigates forecasting breaks and forecasting during breaks. Section 8 draws some implications for economic modeling, forecasting, and policy analysis, while Section 9 concludes.

Keywords: economic forecasting, structural break, economic forecast

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