Shrinking the Posterior: A Note on the Nerlovian Model

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.