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Model uncertainty and policy evaluation : some theory and empirics

  • Brock,W.A.
  • Durlauf,S.N.
  • West,K.D.

    (University of Wisconsin-Madison, Social Systems Research Institute)

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.

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File URL: http://www.ssc.wisc.edu/econ/archive/wp2004-19.pdf
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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 19.

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Date of creation: 2004
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Handle: RePEc:att:wimass:200419
Contact details of provider: Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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  1. Cogley, Timothy & Sargent, Thomas J., 2005. "The conquest of U.S. inflation: learning and robustness to model uncertainty," Working Paper Series 0478, European Central Bank.
  2. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
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  8. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 235-322.
  9. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  10. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
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  24. Carmen Fernandez & Eduardo Ley & Mark F. J. Steel, 2001. "Model uncertainty in cross-country growth regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(5), pages 563-576.
  25. Brock,W.A. & Durlauf,S.N., 2003. "Elements of a theory of design limits to optimal policy," Working papers 25, Wisconsin Madison - Social Systems.
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  39. 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.
  40. Brock,W.A. & Durlauf,S.N., 2004. "Local robustness analysis : theory and application," Working papers 22, Wisconsin Madison - Social Systems.
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