cover_scandinavian-journal-of-economics.gif

Nested Models and Model Uncertainty

Uncertainty about the appropriate choice among nested models is a concern for optimal policy when policy prescriptions from those models differ. The standard procedure is to specify a prior over the parameter space, ignoring the special status of submodels (e.g., those resulting from zero restrictions). Following Sims (2008, Journal of Economic Dynamics and Control 32, 2460–2475), we treat nested submodels as probability models, and we formalize a procedure that ensures that submodels are not discarded too easily and do matter for optimal policy. For the United States, we find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard procedure.

01. April 2016

Authors Alexander Kriwoluzky Christian A. Stoltenberg

Whom to contact

For Researchers

Professor Dr Alexander Kriwoluzky
Professor Dr Alexander Kriwoluzky
Economist

If you have any further questions please contact me.

Request per E-Mail

For Journalists

Mitglied der Leibniz-Gemeinschaft LogoTotal-Equality-LogoWeltoffen Logo