The views expressed in this paper are those of the authors and should not be interpreted as reflecting those of Norges Bank (the central bank of Norway). We are grateful to the editor, an anonymous referee and several colleagues, especially, Ø yvind Eitrheim and Steinar Holden, for useful comments. We have also benefitted from comments made by participants in seminars at Statistics Norway and the Econometric Society European Meeting 2007. The numerical results in the paper were produced by EViews 5.0 (provided by Quantitative Micro Software), GiveWin 2 and PcGive 10; see ‡ and §.
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Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?†
Article first published online: 15 OCT 2008
DOI: 10.1111/j.1468-0084.2008.00516.x
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2008
Additional Information
How to Cite
Farooq Akram, Q. and Nymoen, R. (2009), Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?. Oxford Bulletin of Economics and Statistics, 71: 35–68. doi: 10.1111/j.1468-0084.2008.00516.x
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Publication History
- Issue published online: 16 JAN 2009
- Article first published online: 15 OCT 2008
- Final Manuscript Received: April 2008
- Abstract
- Article
- References
- Cited By
Keywords:
- C52;
- E31;
- E52
Abstract
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.