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Extreme Events and the Origin of Central Bank Priors

Listed author(s):
  • Chollete, Loran

    ()

    (UiS)

  • Schmeidler, David

    (Tel Aviv University)

Where do central bank priors come from and how do policymakers evaluate a model before empirical probabilities are available? To address these questions, we analyze two central banks that choose priors about a rare disaster with the help of expert policy teams. Policymakers are misspecification averse when assessing subjective evidence, and therefore hedge in their selection of priors. This hedging results in priors that accommodate a modicum of belief disagreement.

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File URL: https://dl.dropboxusercontent.com/u/8078351/uis_wps_econ_fin/uis_wps_2014_15_chollete_schmeidler.pdf
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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2014/15.

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Length: 17 pages
Date of creation: 30 Aug 2014
Handle: RePEc:hhs:stavef:2014_015
Contact details of provider: Postal:
University of Stavanger, NO-4036 Stavanger, Norway

Web page: http://www.uis.no/research/economics_and_finance

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  1. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
  3. Chollete, Loran & Schmeidler, David, 2014. "Demand-Theoretic Approach to Choice of Priors," UiS Working Papers in Economics and Finance 2014/14, University of Stavanger.
  4. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, 06.
  5. Gilboa, Itzhak & Schmeidler, David, 2010. "Simplicity and likelihood: An axiomatic approach," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1757-1775, September.
  6. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  7. Raffaella Giacomini & Barbara Rossi, 2009. "Detecting and Predicting Forecast Breakdowns," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 669-705.
  8. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, May.
  9. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 823-866.
  10. Raffaella Giacomini & Barbara Rossi, 2016. "Model Comparisons In Unstable Environments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 369-392, 05.
  11. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  12. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  13. Chollete, Lor & Schmeidler, David, 2014. "Misspecification Aversion and Selection of Initial Priors," UiS Working Papers in Economics and Finance 2014/13, University of Stavanger.
  14. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
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