Evaluating a Model by Forecast Performance*

Although out‐of‐sample forecast performance is often deemed to be the ‘gold standard’ of evaluation, it is not in fact a good yardstick for evaluating models in general. The arguments are illustrated with reference to a recent paper by Carruth, Hooker and Oswald Review of Economics and Statistics (1998) , Vol. 80, pp. 621–628], who suggest that the good dynamic forecasts of their model support the efficiency‐wage theory on which it is based.