Modeling Model Uncertainty

50 Pages Posted: 14 Mar 2003  

Alexei Onatski

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Noah Williams

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: March 2003

Abstract

Recently there has been a great deal of interest in studying monetary policy under model uncertainty. We point out that different assumptions about the uncertainty may result in drastically different robust' policy recommendations. Therefore, we develop new methods to analyze uncertainty about the parameters of a model, the lag specification, the serial correlation of shocks, and the effects of real time data in one coherent structure. We consider both parametric and nonparametric specifications of this structure and use them to estimate the uncertainty in a small model of the US economy. We then use our estimates to compute robust Bayesian and minimax monetary policy rules, which are designed to perform well in the face of uncertainty. Our results suggest that the aggressiveness recently found in robust policy rules is likely to be caused by overemphasizing uncertainty about economic dynamics at low frequencies.

Suggested Citation

Onatski, Alexei and Williams, Noah, Modeling Model Uncertainty (March 2003). NBER Working Paper No. w9566. Available at SSRN: https://ssrn.com/abstract=387573

Alexei Onatski

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Noah Williams (Contact Author)

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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