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On the Mathematical Basis of Inter-temporal Optimization

Author

Listed:
  • David Hendry
  • Grayham E. Mizon

Abstract

Almost 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.

Suggested Citation

  • David Hendry & Grayham E. Mizon, 2010. "On the Mathematical Basis of Inter-temporal Optimization," Economics Series Working Papers 497, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:497
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    File URL: http://www.economics.ox.ac.uk/materials/papers/4421/paper497.pdf
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Elsewhere
      by Robert Vienneau in Thoughts on Economics on 2010-09-18 17:05:00

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    Cited by:

    1. De Grauwe, Paul & Macchiarelli, Corrado, 2015. "Animal spirits and credit cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 95-117.
    2. Alan Kirman, 2014. "Is it rational to have rational expectations?," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 13(1), pages 29-48, June.
    3. 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.
    4. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.
    5. 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 1-2.
    6. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph E. Stiglitz & Tania Treibich, 2017. "Rational Heuristics? Expectations and Behaviors in Evolving Economies with Heterogeneous Interacting Agents," LEM Papers Series 2017/31, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. Alan Kirman, 2016. "Complexity and Economic Policy: A Paradigm Shift or a Change in Perspective? A Review Essay on David Colander and Roland Kupers's Complexity and the Art of Public Policy," Journal of Economic Literature, American Economic Association, vol. 54(2), pages 534-572, June.

    More about this item

    Keywords

    Inter-temporal optimization; Conditional expectations; Law of iterated expectations; Unanticipated breaks;

    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; Diffusion Processes

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