Are State- and Time-Dependent Models Really Different?

Álvarez, Fernando; Lippi, Francesco; Passadore, Juan

doi:10.1086/690243

Cited by 24 publications

(23 citation statements)

References 61 publications

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“…While the TVP models are useful in predicting proportional reactions to small shocks, the state‐dependent models capture the non‐linear impact of large shocks (Alvarez et al . ). The TVP models are usually specified in a state–space form, and are estimated by the Kalman filter algorithm (Kalman, ).…”

Section: Forecasting Methodsmentioning

confidence: 97%

Factor Models and Time‐varying Parameter Framework for Forecasting Exchange Rates and Inflation: A Survey

Kavtaradze

Mokhtari

2017

Journal of Economic Surveys

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A survey of models used for forecasting exchange rates and inflation reveals that the factor-based and time-varying parameter or state space models generate superior forecasts relative to all other models. This survey also finds that models based on Taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates. The evidence on the use of Bayesian Model Averaging approach in forecasting exchange rates reveals limited predictive power, but strong support for forecasting inflation. Overall, the evidence overwhelmingly points to the context of the forecasts, relevance of the historical data, data transformation, choice of the benchmark, selected time horizons, sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation.

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Section: Forecasting Methodsmentioning

confidence: 97%

Factor Models and Time‐varying Parameter Framework for Forecasting Exchange Rates and Inflation: A Survey

Kavtaradze

Mokhtari

2017

Journal of Economic Surveys

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“…Finally, we note that the fact that we can clearly distinguish between models and match the data with a state-dependent pricing model has to do with the size of the shock we focus on. The fact that the Brexit shock is large is important because, as Klenow and Kryvtsov (2008) and Alvarez, Lippi and Passadore (2016) have argued, many of these models are almost observationally equivalent, and thus indistinguishable, under small shocks.…”

Section: The Comparison Between Empirical and Model-based Impulse Resmentioning

confidence: 99%

“…Our second key empirical finding, namely that of a mean reversion in price setting because lower prices change more frequently in response to the shock, is direct evidence of state-dependent price setting by British firms. Previous studies (Alvarez, Lippi and Passadore, 2016;Klenow and Kryvtsov, 2008) pointed out that, under small shocks, time-dependent and state-dependent price setting models are observationally equivalent. However, our results seem to reject the time-dependent models.…”

Section: Introductionmentioning

confidence: 98%

“…1 For example, Bils and Klenow (2004), Dhyne et al (2006), Klenow and Malin (2010), and Nakamura and Steinsson (2008), Nakamura and Steinsson (2010), Midrigan (2011), Kehoe and Midrigan (2015), and Alvarez, Lippi and Passadore (2016). In particular, for the U.K. Kryvtsov and Vincent (2014) and Dixon and Tian (2017).…”

Section: Introductionmentioning

confidence: 99%

“…Most of the existing studies focus on differences in steady-state properties of these two models under various rates of steady-state inflation (e.g.,Alvarez, Lippi and Passadore, 2016; Nakamura et al, 2016).…”

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confidence: 99%

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Using Brexit to Identify the Nature of Price Rigidities

Hobijn¹,

Nechio²,

Shapiro³

2019

ERWP

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Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the price distribution, however, it misses on the magnitude of the adjustment conditional on selection.

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Belief adjustment: a double hurdle model and experimental evidence

et al. 2021

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We present an experiment where subjects sequentially receive signals about the true state of the world and need to form beliefs about which one is true, with payoffs related to reported beliefs. We attempt to control for risk aversion using the Offerman et al. (Rev Econ Stud 76(4):1461–1489, 2009) technique. Against the baseline of Bayesian updating, we test for belief adjustment underreaction and overreaction and model the decision making process of the agent as a double hurdle model where agents with inferential expectations first decide whether to adjust their beliefs and then, if so, decide by how much. We also test the effects of increased inattention and complexity on belief updating. We find evidence for periods of belief inertia interspersed with belief adjustment. This is due to a combination of random belief adjustment; state-dependent belief adjustment, with many subjects requiring considerable evidence to change their beliefs; and quasi-Bayesian belief adjustment, with aggregate insufficient belief adjustment when a belief change does occur. Inattention, like complexity, makes subjects less likely to adjust their stated beliefs, while inattention additionally discourages full adjustment.

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Are State- and Time-Dependent Models Really Different?

Cited by 24 publications

References 61 publications

Factor Models and Time‐varying Parameter Framework for Forecasting Exchange Rates and Inflation: A Survey

Factor Models and Time‐varying Parameter Framework for Forecasting Exchange Rates and Inflation: A Survey

Using Brexit to Identify the Nature of Price Rigidities

Belief adjustment: a double hurdle model and experimental evidence

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