Simple rules versus optimal policy: what fits?
AbstractWe estimate a small open-economy DSGE model for Norway with two specifications of monetary policy: a simple instrument rule and optimal policy based on an intertemporal loss function. The empirical fit of the model with optimal policy is as good as the model with a simple rule. This result is robust to allowing for misspecification following the DSGE-VAR approach proposed by Del Negro and Schorfheide (2004). The interest rate forecasts from the DSGE-VARs are close to Norges Bank's official forecasts since 2005. One interpretation is that the DSGE-VAR approximates the judgment imposed by the policymakers in the forecasting process.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2010/03.
Length: 31 pages
Date of creation: 07 Apr 2010
Date of revision:
Note: First version:
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DSGE models; forecasting; optimal monetary policy;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-02 (All new papers)
- NEP-CBA-2010-05-02 (Central Banking)
- NEP-DGE-2010-05-02 (Dynamic General Equilibrium)
- NEP-FOR-2010-05-02 (Forecasting)
- NEP-MAC-2010-05-02 (Macroeconomics)
- NEP-MON-2010-05-02 (Monetary Economics)
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- Ida Wolden Bache & Anne Sofie Jore & James Mitchell & Shaun P. Vahey, 2009.
"Combining VAR and DSGE forecast densities,"
2009/23, Norges Bank.
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