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 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.
- Thomas J. Sargent & Noah Williams, 2003. "Impacts of priors on convergence and escapes from Nash inflation," Working Paper 2003-14, Federal Reserve Bank of Atlanta.
- 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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