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Model Selection for Monetary Policy Analysis: How Important is Empirical Validity? *
Author(s) -
Farooq Akram Q.,
Nymoen Ragnar
Publication year - 2009
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2008.00516.x
Subject(s) - economics , econometrics , monetary policy , econometric model , model selection , policy analysis , selection (genetic algorithm) , empirical research , empirical modelling , macroeconomics , computer science , statistics , simulation , mathematics , machine learning , artificial intelligence , political science , law
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.