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Model Averaging and Persistent Disagreement

Title
Model Averaging and Persistent Disagreement
Author
조인구
Keywords
NASH EQUILIBRIUM; UNCERTAINTY
Issue Date
2017-07
Publisher
FEDERAL RESERVE BANK ST LOUIS
Citation
FEDERAL RESERVE BANK OF ST LOUIS REVIEW, v. 99, no. 3, page. 279-294
Abstract
The authors consider the following scenario: Two agents construct models of an endogenous price process. One agent thinks the data are stationary, the other thinks the data are nonstationary. A policymaker combines forecasts from the two models using a recursive Bayesian model averaging procedure. The actual (but unknown) price process depends on the policymaker's forecasts. The authors find that if the policymaker has complete faith in the stationary model, then beliefs and outcomes converge to the stationary rational expectations equilibrium. However, even a grain of doubt about stationarity will cause beliefs to settle on the nonstationary model, where prices experience large self-confirming deviations away from the stationary equilibrium. The authors show that it would take centuries of data before agents were able to detect their model misspecifications.
URI
https://research.stlouisfed.org/publications/review/2017/07/05/model-averaging-and-persistent-disagreement/https://repository.hanyang.ac.kr/handle/20.500.11754/114807
ISSN
0014-9187; 2163-4505
DOI
10.20955/r.2017.279-294
Appears in Collections:
COLLEGE OF ECONOMICS AND FINANCE[S](경제금융대학) > ECONOMICS & FINANCE(경제금융학부) > Articles
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