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Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?

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  • Q. Farooq Akram
  • Ragnar Nymoen

Abstract

We investigate the economic significance of trading off empirical validity of models against other desirable model properties. Our investigation is based on three alternative econometric systems of the supply side, in a model that can be used to discuss optimal monetary policy in Norway. Our results caution against compromising empirical validity when selecting a model for policy analysis. We also find large costs from basing policies on the robust model, or on a suite of models, even when it contains the valid model. This confirms an important role for econometric modelling and evaluation in model choice for policy analysis. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2008.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0084.2008.00516.x
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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 71 (2009)
Issue (Month): 1 (02)
Pages: 35-68

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Handle: RePEc:bla:obuest:v:71:y:2009:i:1:p:35-68

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Cited by:
  1. Mardi Dungey & M.Tugrul Vehbi, 2011. "A SVECM Model of the UK Economy and The Term Premium," CAMA Working Papers 2011-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Skrove Falch, Nina & Nymoen, Ragnar, 2011. "The accuracy of a forecast targeting central bank," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5(15), pages 1-36.
  3. Gunnar Bårdsen, Dag Kolsrud, and Ragnar Nymoen, 2012. "Forecast robustness in macroeconometric models," Working Paper Series 13712, Department of Economics, Norwegian University of Science and Technology.

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