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

  • Q. Farooq Akram
  • Ragnar Nymoen

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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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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  1. Rudebusch, Glenn D, 2005. "Assessing the Lucas Critique in Monetary Policy Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 245-72, April.
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