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Model selection for monetary policy analysis How important is empirical validity?

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Author Info

  • Akram, Q. Farooq

    (Research Department, Norges Bank)

  • Nymoen , Ragnar

    ()
    (Dept. of Economics, University of Oslo)

Abstract

We investigate the economic significance of trading off empirical validity of models against other desirable model properties, and the potential loss from ’overestimating’ model uncertainty and basing monetary policy on a relatively robust model, or on a suite of models. We find that differences in model specification and even differences in estimates of key parameters across comparable models may entail widely different monetary policy and macroeconomic performance. Our results therefore caution against compromising the empirical validity of models when selecting a model for policy analysis. We also find that potential costs from basing monetary policies on the relatively robust model or on a suite of models, even when it contains the valid model by assumption, can be quite substantial. This suggests huge gains from efficient exploitation of available information sources to avoid overestimation of model uncertainty. Our investigation is based on three alternative econometric systems of wage and price inflation for Norway

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2007/Memo-14-2007.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 14/2007.

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Length: 38 pages
Date of creation: 09 Jul 2007
Date of revision:
Handle: RePEc:hhs:osloec:2007_014

Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Email:
Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: Model uncertainty; Economic significance; Econometric modelling;

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References

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  1. Gunnar Bårdsen & Q. Farooq Akram & Øyvind Eitrheim, 2005. "Monetary policy and asset prices: To respond or not?," Working Paper Series 5405, Department of Economics, Norwegian University of Science and Technology.
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  17. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 205-228.
  18. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003. "Econometric inflation targeting," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 430-461, December.
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Citations

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Cited by:
  1. Falch, Nina Skrove & Nymoen, Ragnar, 2011. "The accuracy of a forecast targeting central bank," Economics Discussion Papers 2011-6, Kiel Institute for the World Economy.
  2. 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.
  3. Bårdsen, Gunnar & den Reijer, Ard & Jonasson, Patrik & Nymoen, Ragnar, 2012. "MOSES: Model for studying the economy of Sweden," Economic Modelling, Elsevier, vol. 29(6), pages 2566-2582.
  4. Gunnar Bårdsen & Dag Kolsrud & 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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