Premium
Shrinking the Posterior: A Note on the Nerlovian Model
Author(s) -
Tiffin Richard
Publication year - 2004
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/j.1477-9552.2004.tb00083.x
Subject(s) - estimator , econometrics , bayesian probability , bayes estimator , economics , elasticity (physics) , estimation , white noise , mathematical economics , mathematics , statistics , materials science , composite material , management
Diebold and Lamb (1997) argue that since the long‐run elasticity of supply derived from the Nerlovian model entails a ratio of random variables, it is without moments. They propose minimum expected loss estimation to correct this problem but in sodoing ignore the fact that a non white‐noise‐error is implicit in the model. We show that, as a consequence the estimator is biased and demonstrate that Bayesian estimation which fully accounts for the error structure is preferable.