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Model uncertainty and policy evaluation: some theory and empirics

Author

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  • William A. Brock
  • Steven N. Durlauf
  • Kenneth D. West
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

  • William A. Brock & Steven N. Durlauf & Kenneth D. West, 2005. "Model uncertainty and policy evaluation: some theory and empirics," Proceedings, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfpr:y:2005:x:6
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Monetary policy;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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