Progress from Forecast Failure - the Norwegian Consumption Function

25 Pages Posted: 2 Dec 2002

See all articles by Oyvind Eitrheim

Oyvind Eitrheim

Norges Bank - Research Department

Eilev S. Jansen

Statistics Norway; Norges Bank - Research Department

Ragnar Nymoen

University of Oslo - Department of Economics

Abstract

After a forecast failure, a respecification is usually necessary to account for the data ex post, in which case there is a gain in knowledge as a result of the forecast failure. Using Norwegian consumption as an example, we show that the financial deregulation in the mid-1980s led to forecast failure both for consumption functions (CFs) and Euler equations (EEs). We argue in the paper that such forecast failures would appear to be at odds with an underlying DGP belonging to the class of EEs, a result that also explains why progress took the form of a respecified CF where wealth plays a central role. That model is updated and is shown to have constant parameters despite huge changes in the income to wealth ratio over nine years of new data.

Keywords: Consumption functions, Equilibrium correction models, Euler equations, Financial deregulation, Forecast failure, Progressive research strategies, VAR models

Suggested Citation

Eitrheim, Oyvind and Jansen, Eilev Sandvik and Nymoen, Ragnar, Progress from Forecast Failure - the Norwegian Consumption Function. Available at SSRN: https://ssrn.com/abstract=314321

Oyvind Eitrheim (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Eilev Sandvik Jansen

Statistics Norway ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+4791387583 (Phone)
+4721090040 (Fax)

HOME PAGE: http://folk.ssb.no/eja/

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Ragnar Nymoen

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

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