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Chile economic model.

The Theil coefficients can also be decomposed into three major components: the bias, variance, and covariance terms. The bias proportion measures the extent to which the average value of the simulated series deviates from its historical value, while the variance and covariance ratios measure, respectively, the capacity of the model to simulate the historical variability in the variable, and its ability to replicate the remaining error after the average deviations have been accounted for. Ideally, the bias and variance components should equal zero, while the covariance proportion should 216 EASTERN ECONOMIC JOURNAL TABLE 5 Chile: In-Sample Forecast Evaluation for Error Correction Models. Equation (3) Equation (4) Sample: 1967 2000 Root Mean Squared Error (RMS) 2.3855 2.2165 Mean Absolute Error (MAE) 1.7691 1.6628 Theil Inequality Coefficient (TIC) 0.2108 0.2015 Bias Proportion (BP) 0.0000 0.0000 Variance Proportion (VP) 0.0011 0.0331 Covariance Proportion (CP) 0.9988 0.9668 Sample: 1967 1995 RMS 2.7200 2.3504 MAE 2.1189 1.8777 TIC 0.2276 0.2004 BP 0.0002 0.0000 VP 0.0059 0.0339 CP 0.9938 0.9660 Sample: 1970 2000 RMS 2.1939 1.8973 MAE 2.7171 1.3801 TIC 0.1932 0.1640 BP 0.0058 0.0000 VP 0.0560 0.0295 CP 0.9380 0.9704 Note: In-Sample Forecast estimates generated with EVIEWS 4.1 equal one. Table 5 shows that all of these ratios are close to their optimum values. Sensitivity analysis on the coefficients also revealed that changes in the initial or ending period did not alter the predictive power of the selected models (or, for that matter, any of the models run in this study). Figure 1, corresponding to equation (4) in Table 4, provides visual evidence of the models’ ability to track the turning points in the actual series. (PGR) refers to the actual series and (PGRF) denotes the in-sample fit. It also highlights the Chilean economy’s highly variable and, at best, modest increase in labor productivity for the period under review. Part of the explanation for this lackluster performance resides in the country’s tumultuous economic and political history, particularly during the seventies and early eighties. However, beginning in 1985 and following the return to civilian rule, there is evidence of a modest upward trend in labor productivity, although it is too early to tell whether this represents a permanent break with the past.