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Model Validation and Learning

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Abstract

This paper studies adaptive learning with multiple models. An agent operating in a self-referential environment is aware of potential model misspecification, and tries to detect it, in real-time, using an econometric specification test. If the current model passes the test, it is used to construct an optimal policy. If it fails the test, a new model is selected from a fixed set of models. As the rate of coefficient updating decreases, one model becomes dominant, and is used 'almost always'. Dominant models can be characterized using the tools of large deviations theory. The analysis is applied to Sargent's (1999) Phillips Curve model.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-07.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-07.

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Length: 35
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:sfu:sfudps:dp12-07

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: Learning; Model validation;

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References

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  1. Brock,W.A. & Durlauf,S.N. & West,K.D., 2004. "Model uncertainty and policy evaluation : some theory and empirics," Working papers 19, Wisconsin Madison - Social Systems.
  2. 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.
  3. Sin, Chor-Yiu & White, Halbert, 1996. "Information criteria for selecting possibly misspecified parametric models," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 207-225.
  4. Chu, Chia-Shang James & Stinchcombe, Maxwell & White, Halbert, 1996. "Monitoring Structural Change," Econometrica, Econometric Society, vol. 64(5), pages 1045-65, September.
  5. Timothy Cogley & Riccardo Colacito & Lars Peter Hansen & Thomas J. Sargent, 2008. "Robustness and U.S. Monetary Policy Experimentation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1599-1623, December.
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