Bayesian Model Averaging, Learning and Model Selection

Seppo Honkapohja, Thomas Sargent, George Evans and Noah Williams

No 8917, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Grain of truth; Rational expectations equilibrium; Time-varying perceptions (search for similar items in EconPapers)
JEL-codes: D83 D84 E37 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Baysian Model Averaging, Learning and Model Selection (2012)
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