Bayesian Model Averaging, Learning and Model Selection
Agents 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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- Thomas J. Sargent & Noah Williams, 2003.
"Impacts of priors on convergence and escapes from Nash inflation,"
FRB Atlanta Working Paper
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.
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- Cogley, Timothy & Sargent, Thomas J., 2005.
"The conquest of U.S. inflation: learning and robustness to model uncertainty,"
Working Paper Series
0478, European Central Bank.
- Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
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