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Discussion Paper Details

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Title: Bayesian Model Averaging, Learning and Model Selection

Author(s): George W. Evans, Seppo Honkapohja, Thomas J Sargent and Noah Williams

Publication Date: March 2012

Keyword(s): grain of truth, rational expectations equilibrium and Time-varying perceptions

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Evans, G, Honkapohja, S, Sargent, T and Williams, N. 2012. 'Bayesian Model Averaging, Learning and Model Selection'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8917