Model uncertainty

Because there are gaps in our knowledge of the constantly changing structure of macroeconomic relationships, there is always uncertainty, especially in central bank policy, about the most appropriate monetary policy measures. In particular, it is not possible to determine precisely – the current strength and moving power of individual model variables, – the “correct” technique of estimation with regard to future changes in the variables, – the exact delimitation of important variables, such as the money supply according to M1, M2 and M3 or the measurement of the price level, and – the extent to which previously observed regularities and behaviors may be assumed for the future. – Finally, the selection of variables to be included in any model raises a number of difficult decision issues. – See instructions, monetary, data uncertainty, monetary policy, forward-looking, equilibrium models, dynamic-stochastic, hurricane shocks, models, monetary, model beliefs, model risk, pandemic, shocks, structural, thrift rule, structural uncertainty, uncertainty. – Cf. Deutsche Bundesbank Monthly Report of June 2004, pp. 16 ff.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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