Bayesian Model Averaging, Learning and Model Selection
AbstractAgents have two forecasting models, one consistent with the unique rational expectations equilibrium, another that assumes a time-varying parameter structure. When agents use Bayesian updating to choose between models in a self-referential system, we find that learning dynamics lead to selection of one of the two models. However, there are parameter regions for which the non-rational forecasting model is selected in the long-run. A key structural parameter governing outcomes measures the degree of expectations feedback in Muth's model of price determination.
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201203.
Date of creation: 25 Jan 2012
Date of revision:
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Learning dynamics; Bayesian model averaging; grain of truth; self-referential systems.;
Other versions of this item:
- Mitra, Kaushik & Evans, George W. & Honkapohja, Seppo, 2012. "Baysian Model Averaging, Learning and Model Selection," SIRE Discussion Papers 2012-11, Scottish Institute for Research in Economics (SIRE).
- Evans, George W. & Honkapohja, Seppo & Sargent, Thomas J & Williams, Noah, 2012. "Bayesian Model Averaging, Learning and Model Selection," CEPR Discussion Papers 8917, C.E.P.R. Discussion Papers.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-CTA-2012-07-01 (Contract Theory & Applications)
- NEP-DGE-2012-07-01 (Dynamic General Equilibrium)
- NEP-FOR-2012-07-01 (Forecasting)
- NEP-MIC-2012-07-01 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thomas J. Sargent & Noah Williams, 2003.
"Impacts of priors on convergence and escapes from Nash inflation,"
2003-14, Federal Reserve Bank of Atlanta.
- Thomas J. Sargent & Noah William, 2005. "Impacts of Priors on Convergence and Escapes from Nash Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 360-391, April.
- Bullard, James, 1992. "Time-varying parameters and nonconvergence to rational expectations under least squares learning," Economics Letters, Elsevier, vol. 40(2), pages 159-166, October.
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