On the Mathematical Basis of Inter-temporal Optimization
AbstractAlmost 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 InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 497.
Date of creation: 01 Aug 2010
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Inter-temporal optimization; Conditional expectations; Law of iterated expectations; Unanticipated breaks;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-28 (All new papers)
- NEP-ETS-2010-08-28 (Econometric Time Series)
- NEP-HPE-2010-08-28 (History & Philosophy of Economics)
- NEP-ORE-2010-08-28 (Operations Research)
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- 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.
- Alan Kirman, 2014. "Is it rational to have rational expectations?," Mind and Society: Cognitive Studies in Economics and Social Sciences, Fondazione Rosselli, vol. 13(1), pages 29-48, June.
- 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.
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