Scandinavian Working Papers in Economics

UiS Working Papers in Economics and Finance,
University of Stavanger

No 2014/15: Extreme Events and the Origin of Central Bank Priors

Loran Chollete () and David Schmeidler
Additional contact information
Loran Chollete: UiS, Postal: University of Stavanger, NO-4036 Stavanger, Norway
David Schmeidler: 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.

Keywords: Belief Disagreement; Central Bank; Misspecification Aversion; Rare Disaster; Subjective Evidence

JEL-codes: A10

17 pages, August 30, 2014

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