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Extreme Events and the Origin of Central Bank Priors

Author

Listed:
  • Chollete, Loran

    (UiS)

  • Schmeidler, David

    (Tel Aviv University)

Abstract

Where do central bank priors come from and how do policymakers evaluate a model before empirical probabilities are available? To address these questions, we analyze two central banks that choose priors about a rare disaster with the help of expert policy teams. Policymakers are misspecification averse when assessing subjective evidence, and therefore hedge in their selection of priors. This hedging results in priors that accommodate a modicum of belief disagreement.

Suggested Citation

  • Chollete, Loran & Schmeidler, David, 2014. "Extreme Events and the Origin of Central Bank Priors," UiS Working Papers in Economics and Finance 2014/15, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2014_015
    as

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    References listed on IDEAS

    as
    1. Chollete, Loran & Schmeidler, David, 2014. "Demand-Theoretic Approach to Choice of Priors," UiS Working Papers in Economics and Finance 2014/14, University of Stavanger.
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    Cited by:

    1. Chollete, Lor & Schmeidler, David, 2014. "Misspecification Aversion and Selection of Initial Priors," UiS Working Papers in Economics and Finance 2014/13, University of Stavanger.

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    More about this item

    Keywords

    Belief Disagreement; Central Bank; Misspecification Aversion; Rare Disaster; Subjective Evidence;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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