Modeling model uncertainty

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Modeling model uncertainty

Author Info

Alexei Onatski () (Columbia University - Department of Economics, 420 W. 118th Street, New York , NY 10027, United States.)
Noah Williams () (Princeton University - Department of Economics, Fisher Hall, Princeton , NJ 08544-1021, United States.)

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Abstract

Recently there has been much interest in studying monetary policy under model uncertainty. We develop methods to analyze different sources of uncertainty in one coherent structure useful for policy decisions. We show how to estimate the size of the uncertainty based on time series data, and incorporate this uncertainty in policy optimization. We propose two different approaches to modeling model uncertainty. The first is model error modeling, which imposes additional structure on the errors of an estimated model, and builds a statistical description of the uncertainty around a model. The second is set membership identification, which uses a deterministic approach to find a set of models consistent with data and prior assumptions. The center of this set becomes a benchmark model, and the radius measures model uncertainty. Using both approaches, we compute the robust monetary policy under different model uncertainty specifications in a small model of the US economy. JEL Classification: E52; C32; D81.

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Paper provided by European Central Bank in its series Working Paper Series with number 169.

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Length: 51 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:ecb:ecbwps:20020169

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Article
- Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, 09. [Downloadable!] (restricted)
Paper
- Alexei Onatski & Noah Williams, 2002. "Modeling model uncertainty," Discussion Papers 0203-05, Columbia University, Department of Economics. [Downloadable!]
- Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," NBER Working Papers 9566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

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Other versions:
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Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
Other versions:
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