Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?* |
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Authors: | Q Farooq Akram Ragnar Nymoen |
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Institution: | 1. Research Department, Norges Bank, Bankplassen 2, P.O. Box 1179 Sentrum, 0107 Oslo, Norway (e‐mail: farooq.akram@norges‐bank.no);2. Department of Economics, University of Oslo, Norway (e‐mail: ragnar.nymoen@econ.uio.no) |
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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. |
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Keywords: | C52 E31 E52 |
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