Model Uncertainty and Policy Evaluation: Some Theory and Empirics

59 Pages Posted: 8 Dec 2004

See all articles by William A. Brock

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Steven N. Durlauf

University of Chicago; National Bureau of Economic Research (NBER)

Kenneth D. West

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

Date Written: November 2004

Abstract

This paper explores ways to integrate model uncertainty into policy evaluation. We first describe a general framework for the incorporation of model uncertainty into standard econometric calculations. This framework employs Bayesian model averaging methods that have begun to appear in a range of economic studies. Second, we illustrate these general ideas in the context of assessment of simple monetary policy rules for some standard New Keynesian specifications. The specifications vary in their treatment of expectations as well as in the dynamics of output and inflation. We conclude that the Taylor rule has good robustness properties, but may reasonably be challenged in overall quality with respect to stabilization by alternative simple rules that also condition on lagged interest rates, even though these rules employ parameters that are set without accounting for model uncertainty.

Suggested Citation

Brock, William A. and Durlauf, Steven N. and West, Kenneth D., Model Uncertainty and Policy Evaluation: Some Theory and Empirics (November 2004). NBER Working Paper No. w10916. Available at SSRN: https://ssrn.com/abstract=622630

William A. Brock

University of Wisconsin, Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
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608-263-6655 (Phone)
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University of Missouri at Columbia - Department of Economics ( email )

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Steven N. Durlauf (Contact Author)

University of Chicago ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Kenneth D. West

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-0033 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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