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

Qaisar Akram and Ragnar Nymoen ()

Oxford Bulletin of Economics and Statistics, 2009, vol. 71, issue 1, 35-68

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.

Date: 2009
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https://doi.org/10.1111/j.1468-0084.2008.00516.x

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Working Paper: Model selection for monetary policy analysis How important is empirical validity? (2007)
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