Stationarity, structural change and specification in a demand system: the case of energy

The impact of structural change, stationarity of the data and economic theory on energy modelling and forecasting, is investigated for Germany and the UK, using two three-equation models which allow for the long- and short-run behaviour of the constituent variables. The models are specified, restricted and estimated to comply with the above conditions and they are then used to generate one step ahead and dynamic forecasts from each of the two models; one with structural change, and the other without. These forecasts and other aspects of the models are then used to choose the specification. In general structural change, stationarity of the data and economic theory are shown to have important implications for model specification and forecasting.

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