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Improving monetary policy models

Authors
Journal
Journal of Economic Dynamics and Control
0165-1889
Publisher
Elsevier
Publication Date
Volume
32
Issue
8
Identifiers
DOI: 10.1016/j.jedc.2007.09.004
Keywords
  • Econometric Models
  • Central Bank Models
  • Bayesian Inference
Disciplines
  • Economics

Abstract

Abstract If macroeconomic models are to be useful in policy-making, where uncertainty is pervasive, the models must be treated as probability models, whether formally or informally. Use of explicit probability models allows us to learn systematically from past mistakes, to integrate model-based uncertainty with uncertain subjective judgment, and to bind data-based forecasting together with theory-based projection of policy effects. Yet in the last few decades policy models at central banks have steadily shed any claims to being believable probability models of the data to which they are fit. Here we describe the current state of policy modeling, suggest some reasons why we have reached this state, and assess some promising directions for future progress.

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