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On the Mathematical Basis of Inter-temporal Optimization

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  • David Hendry
  • Grayham E. Mizon

Abstract

Almost no economic time series is either weakly or strictly stationary: distributions of economic variables shift over time.� Thus, the present treatment of expectations in economic theories of inter-temporal optimization is inappropriate.� It cannot be proved that conditional expectations based on the current distribution are minimum mean-square error 1-step ahead predictors when unanticipated breaks occur, and consequentially, the law of iterated expectations then fails inter-temporally.� A�second consequence is that dynamic stochastic general equilibrium models are intrinsically non-structural.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 497.

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Date of creation: 01 Aug 2010
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Handle: RePEc:oxf:wpaper:497

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Keywords: Inter-temporal optimization; Conditional expectations; Law of iterated expectations; Unanticipated breaks;

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  1. Elsewhere
    by Robert Vienneau in Thoughts on Economics on 2010-09-18 12:05:00
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Cited by:
  1. Robin Pope & Reinhard Selten & Sebastian Kube & Jürgen von Hagen, 2009. "Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency," Bonn Econ Discussion Papers bgse26_2009, University of Bonn, Germany.
  2. André K. Anundsen & Ragnar Nymoen & Tord S. Krogh & Jon Vislie, 2012. "The macroeconomics of Trygve Haavelmo," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 37, pages 2.
  3. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.

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