Nested models and model uncertainty

Alexander Kriwoluzky and Christian A. Stoltenberg

No ECO2009/37, Economics Working Papers from European University Institute

Abstract: Uncertainty about the appropriate choice among nested models is a central concern for optimal policy when policy prescriptions from those models differ. The standard procedure is to specify a prior over the parameter space ignoring the special status of some sub-models, e.g. those resulting from zero restrictions. This is especially problematic if a model's generalization could be either true progress or the latest fad found to fit the data. We propose a procedure that ensures that the specified set of sub-models is not discarded too easily and thus receives no weight in determining optimal policy. We find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard practice.

Keywords: Optimal monetary policy; model uncertainty; Bayesian model estimation (search for similar items in EconPapers)
JEL-codes: C51 E32 E52 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://cadmus.eui.eu/dspace/bitstream/1814/12694/1/ECO_2009_37.pdf main text
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://cadmus.eui.eu/dspace/bitstream/1814/12694/1/ECO_2009_37.pdf [301 Moved Permanently]--> https://cadmus.eui.eu/dspace/bitstream/1814/12694/1/ECO_2009_37.pdf)

Related works:
Journal Article: Nested Models and Model Uncertainty (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2009/37

Access Statistics for this paper

More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Cécile Brière ().