On the Mathematical Basis of Inter-temporal Optimization

David Hendry and Grayham Mizon

No 497, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Almost no economic time series is either weakly or strictly stationary: distributions of economic variables shift over time. Thus, the present treatment of expectations in economic theories of inter-temporal optimization is inappropriate. It cannot be proved that conditional expectations based on the current distribution are minimum mean-square error 1-step ahead predictors when unanticipated breaks occur, and consequentially, the law of iterated expectations then fails inter-temporally. Asecond consequence is that dynamic stochastic general equilibrium models are intrinsically non-structural.

Keywords: Inter-temporal optimization; Conditional expectations; Law of iterated expectations; Unanticipated breaks (search for similar items in EconPapers)
JEL-codes: C02 C22 (search for similar items in EconPapers)
Date: 2010-08-01
New Economics Papers: this item is included in nep-ets, nep-hpe and nep-ore
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Citations: View citations in EconPapers (24)

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