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Model uncertainty, state uncertainty, and state-space models

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  • Yulei Luo
  • Jun Nie
  • Eric R. Young

Abstract

This technical paper considers ways to capture uncertainty in the context of so-called "state-space" models. ; State-space models are powerful tools commonly used in macroeconomics, international economics, and finance. State-space models can generate estimates of an underlying, ultimately unobserved variable—such as the natural rate of unemployment—based on the movements of other variables that are observed and have some relationship to the unobserved variable. The paper shows how several macroeconomic models can be mapped to the state-space framework, thus helping quantify uncertainty about the true model (model uncertainty) or about the amount of information available when decisions are made (state uncertainty).

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File URL: http://kansascityfed.org/publicat/reswkpap/pdf/rwp12-02.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 12-02.

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Date of creation: 2012
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Handle: RePEc:fip:fedkrw:rwp12-02

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  1. Luo, Yulei & Nie, Jun & Young, Eric, 2014. "Model Uncertainty and Intertemporal Tax Smoothing," MPRA Paper 54268, University Library of Munich, Germany.
  2. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 317-339, June.
  3. Yulei Luo & Jun Nie & Eric R. Young, 2010. "Robustness, information-processing constraints, and the current account in small open economies," Research Working Paper RWP 10-17, Federal Reserve Bank of Kansas City.
  4. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 873-907, October.
  5. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  6. Yulei Luo & Eric R.Young & Jun Nie, 2011. "Robust Control, Informational Frictions, and International Consumption Correlations," 2011 Meeting Papers 209, Society for Economic Dynamics.
  7. Yulei Luo & Eric R. Young, 2010. "Risk-Sensitive Consumption and Savings under Rational Inattention," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 281-325, October.
  8. Hansen, Lars Peter & Sargent, Thomas J. & Wang, Neng E., 2002. "Robust Permanent Income And Pricing With Filtering," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 40-84, February.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
  10. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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