Bayesian Model Averaging, Learning and Model Selection

Seppo Honkapohja, Thomas Sargent, George Evans and Noah Williams

No 8917, CEPR Discussion Papers from Centre for Economic Policy Research

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 (8)

Downloads: (external link)
https://cepr.org/publications/DP8917 (application/pdf)

Related works:
Working Paper: Baysian Model Averaging, Learning and Model Selection (2012)
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:cpr:ceprdp:8917

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8917

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().