IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Model uncertainty and policy evaluation: Some theory and empirics

  • Brock, William A.
  • Durlauf, Steven N.
  • West, Kenneth D.

This paper explores ways to integrate model uncertainty into policy evaluation. We first describe a general framework for the incorporation of model uncertainty into standard econometric calculations. This framework employs Bayesian model averaging methods that have begun to appear in a range of economic studies. Second, we illustrate these general ideas in the context of assessment of simple monetary policy rules for some standard New Keynesian specifications. The specifications vary in their treatment of expectations as well as in the dynamics of output and inflation. We conclude that the Taylor rule has good robustness properties, but may reasonably be challenged in overall quality with respect to stabilization by alternative simple rules that also condition on lagged interest rates, even though these rules employ parameters that are set without accounting for model uncertainty.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 136 (2007)
Issue (Month): 2 (February)
Pages: 629-664

in new window

Handle: RePEc:eee:econom:v:136:y:2007:i:2:p:629-664
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jonathan H. Wright, 2003. "Forecasting U.S. inflation by Bayesian Model Averaging," International Finance Discussion Papers 780, Board of Governors of the Federal Reserve System (U.S.).
  2. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  3. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
  4. Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 2000-03, Federal Reserve Bank of San Francisco.
  5. repec:cup:macdyn:v:6:y:2002:i:1:p:167-85 is not listed on IDEAS
  6. William A. Brock & Steven N. Durlauf, 2004. "Elements of a Theory of Design Limits to Optimal Policy," Manchester School, University of Manchester, vol. 72(s1), pages 1-18, 09.
  7. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  8. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
  9. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  10. Marc P. Giannoni, 2007. "Robust optimal monetary policy in a forward-looking model with parameter and shock uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 179-213.
  11. Chamberlain, Gary, 2000. "Econometrics and decision theory," Journal of Econometrics, Elsevier, vol. 95(2), pages 255-283, April.
  12. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, 09.
  13. Carmen Fernandez & Eduardo Ley & Mark Steel, 1999. "Model uncertainty in cross-country growth regressions," Econometrics 9903003, EconWPA, revised 06 Oct 2001.
  14. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
  15. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
  16. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
  17. M. Hashem Pesaran, 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," CESifo Working Paper Series 345, CESifo Group Munich.
  18. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Forecasting Time Series Subject to Multiple Structural Breaks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1057-1084.
  19. Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
  20. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," NBER Working Papers 10025, National Bureau of Economic Research, Inc.
  21. Marcellino, Massimiliano & Salmon, Mark, 2002. "Robust Decision Theory And The Lucas Critique," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 167-185, February.
  22. Marco Del Negro & Frank Schorfheide, 2005. "Policy Predictions if the Model Does Not Fit," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 434-443, 04/05.
  23. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June.
  24. Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
  25. Avramov, Doron, 2002. "Stock return predictability and model uncertainty," Journal of Financial Economics, Elsevier, vol. 64(3), pages 423-458, June.
  26. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
  27. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, September.
  28. Levin, Andrew T. & Williams, John C., 2003. "Robust monetary policy with competing reference models," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 945-975, July.
  29. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
  30. Brock,W.A. & Durlauf,S.N., 2000. "Growth economics and reality," Working papers 24, Wisconsin Madison - Social Systems.
  31. Brock, William A. & Durlauf, Steven N., 2005. "Local robustness analysis: Theory and application," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 2067-2092, November.
  32. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  33. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  34. Wright, Jonathan H., 2008. "Bayesian Model Averaging and exchange rate forecasts," Journal of Econometrics, Elsevier, vol. 146(2), pages 329-341, October.
  35. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
  36. Edward E. Leamer, 1982. "Let's Take the Con Out of Econometrics," UCLA Economics Working Papers 239, UCLA Department of Economics.
  37. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
  38. Lars Peter Hansen & Thomas J. Sargent, 2005. "Certainty equivalence and model uncertainty," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:136:y:2007:i:2:p:629-664. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.