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Hello,
Does anyone know how to obtain (the formula) the range of parameters with beta distribution? for example, in Smets and Wouters (2003), they said that with beta prior of mean = 0.75 and standard error = 0.05 for the calvo price parameters, the length of the contract (=1/(1-calvo), 1/(1-0.75)=4 quarters for the mean) ranges between 3 quarters to 8 quarters. I could not find this range using [0.75-2*0.05, 0.75+2*0.05].
Thanks for any help,
Tovonony

The beta is not the normal distribution. Hence, the rule of thumb with the two does not work. You can use http://en.wikipedia.org/wiki/Beta_distribution to compute the hyper-parameters. I guess it should be something along the lines of

Code: Select all

mu=0.75;
stdd=0.05;
a = (1-mu)*mu^2/stdd^2 - mu ;
b = a*(1/mu-1) ;
x_low=betainv(0.05,a,b);
x_high=betainv(0.95,a,b);
calvo_low=1/(1-x_low)
calvo_high=1/(1-x_high)


I may be wrong as only the lower bound fits.