Can Agents with Causal Misperceptions be Systematically Fooled?
Ran Spiegler (rani@tauex.tau.ac.il)
No 11379, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Abstract:
The conventional rational-expectations postulate rules out the possibility that agents will form systematically biased forecasts of economic variables. I revisit this question under the assumption that agents' expectations are based on a misperceived causal model. Specifically, I analyze a model in which an agent forms forecasts of economic variables after observing a signal. His forecasts are based on fitting a subjective causal model - formalized as a direct acyclic graph, following the "Bayesian networks" literature - to objective long-run data. I show that the agent's forecasts are never systematically biased if and only if his graph is perfect - equivalently, if the direction of the causal links he postulates has no empirical content. I demonstrate the relevance of this result for economic applications - mainly a stylized "monetary policy" example in which the inflation-output relation obeys an expectations-augmented Phillips curve.
Date: 2016-07
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Related works:
Journal Article: Can Agents with Causal Misperceptions be Systematically Fooled? (2020)
Working Paper: Can Agents with Causal Misperceptions be Systemically Fooled? (2016)
Working Paper: Can agents with causal misperceptions be systematically fooled? (2016)
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