Initial Beliefs Uncertainty
Jaqueson Galimberti
The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 45-96
Abstract:
This paper evaluates how initial beliefs uncertainty can affect data weighting and the estimation of models with adaptive learning. One key finding is that misspecification of initial beliefs uncertainty, particularly with the common approach of artificially inflating initials uncertainty to accelerate convergence of estimates, generates time-varying profiles of weights given to past observations in what should otherwise follow a fixed profile of decaying weights. The effect of this misspecification, denoted as diffuse initials, is shown to distort the estimation and interpretation of learning in finite samples. Simulations of a forward-looking Phillips curve model indicate that (i) diffuse initials lead to downward biased estimates of expectations relevance in the determination of actual inflation, and (ii) these biases spill over to estimates of inflation responsiveness to output gaps. An empirical application with U.S. data shows the relevance of these effects for the determination of expectational stability over decadal subsamples of data. The use of diffuse initials is also found to lead to downward biased estimates of learning gains, both estimated from an aggregate representative model and estimated to match individual expectations from survey expectations data.
Keywords: expectations; adaptive learning; bounded rationality; macroeconomics (search for similar items in EconPapers)
JEL-codes: C32 C63 D83 D84 E37 E70 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:
Downloads: (external link)
https://doi.org/10.1515/bejm-2023-0069 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.
Related works:
Working Paper: Initial beliefs uncertainty (2021) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:24:y:2024:i:1:p:45-96:n:8
Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/bejm/html
DOI: 10.1515/bejm-2023-0069
Access Statistics for this article
The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti
More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().