Download Are Policy Variables Exogenous?: The Econometric by Balazs Horvath PDF

By Balazs Horvath

1. 1 Motivation and Definition of subject to supply motivation and to assist outline the subject of this examine, vital hyperlinks among particular components of monetary conception are first highlighted. (i) studying and Rational expectancies idea In a typical rational expectancies atmosphere, brokers in equilibrium have all of the information regarding the version that permits them to properly forecast destiny payoff-relevant variables. What rational expectancies thought in its common shape doesn't let us know is what occurs outdoor a rational expectancies equilibrium. under whole wisdom of the version is a potential solution to symbolize a scenario open air the rational expectancies equilibrium. it's usual to imagine that brokers realize blunders and optimally make the most of all on hand exterior info to enhance on their details point, i. e. research. in keeping with the data bought via studying they alter their habit. lower than sure stipulations studying steers the economic climate to the rational expectancies equilibrium (Spear (1989), Blume, Bray and Easley (1982), Townsend (1983». This literature indicates that studying is a potential mechanism to obtain the required point of knowledge that brokers are assumed to own in a rational expectancies equilibrium and as a result there's a transparent hyperlink among rational expectancies idea and the two thought of studying. This truth is additionally emphasised between others by means of Friedman (1975), Pesaran (1987) and DeCanio (1979). (ii) Rational expectancies and Econometrics The equilibrium effects of the rational expectancies speculation are mentioned in a substantial physique of literature - cf.

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Extra resources for Are Policy Variables Exogenous?: The Econometric Implications of Learning while Maximizing

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Specific distributional assumptions or a restrictive specification for the objective function may rule it out altogether. e. totally myopic optimization. The statistical procedure that the agent is endowed with in the model is more general than it seems in one respect, less general in another. Although Bayesian updating is utilized, it is well known that with a diffuse prior, a normal belief distribution to be updated and a squared error loss function, the result coincides with that of ordinary least squares learning.

Agent i observes only t-l, 2, ... , T. Given his assumptions on the economy and modelling learning via Kalman filtering, Townsend concludes that v it is serially correlated. Suppose that the individual's decision rule is This implies under linear aggregation the relationship 51 * where Zt and (t Therefore the aggregate marginal model has error (t which is evidently also serially correlated due to the presence of learning. For simplicity assume serial correlation of order 1. p - (fJ, p). Consider the case cov(Zt'U t ) - O.

The key fact to note here is that the increment in information depends on the particular sequence of policy variables that have been applied. Thus, ev~n in a non-game situation, and assuming away the potential sensitivity of the aggregator function to policy regime changes, learning behavior alone can explain a different observed behavior of the economic agent with a different data generating process for the policy variable. Hence, the assumption of learning is a plausible alternative source of loss of structural invariance of parameters in a model describing the behavior of an economic agent and thus has implications similar to those of the Lucas critique.

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