papers in preparation and working papers

How wise is commitment in the face of model uncertainty?

with Juha Kilponen, Bank of Finland.

We study discretion and commitment in a modern estimated DSGE model of the US economy under model coefficient uncertainty. Appropriate commitment hinges on correct specification of the expectations channels of monetary policy and the proper evaluation of expecations. Both of these elements may be heavily distorted under model uncertainty, reducing the desirability of commitment. Since commitment is rare in practice, model uncertainty may explain why.


Making a CB accountable: Evaluating historic and future monetary policy with a macroeconometric model under optimal inflation-targeting policy

with Gunnar Bårdsen, Norwegian University of Technology and Science.

Instrument independence in monetary policy requires that the central bank can be made accountable for their decisions so that the mandate can be properly enforced. In this paper, we use an empirical macroeconometric model of the Norwegian economy to evaluate the setting of the short-term interest rate by Norges Bank over the period 2001 to the present and the future, comparing CB forecast with forecast of optimal policy in the model.


Monetary Policy Design for Optimal Well-being

Studies of what makes us happy have taught us several lessons on what matters for peoples' well-being. This project aims to describe the effects on the optimal design of monetary policy. What should the assigned mandate of the central bank be? The effects are explored in an Alternative New Keynesian (ANK) model of the US economy.


Identifying monetary policy and financial market interaction with Structural Model Design

with Roger Hammersland, Statistics Norway.

We apply the structural design methodology of Hammersland (2008) to identify monetary and stock market shocks, systematic behaviour and interaction in the US economy. The design does not rely on essential ad hoc temporary restrictions on the covariance matrix but rather on exogenous identification of periods where behaviour deviates from normal operations. As there exists allegedly broader consensus about these periods, the identification procedure contributes to improved structural interpretations. We aim to study the whether the approach is able to eliminate the puzzles often observed in empirical investigations.


Pscyhonomics: How employee personality affects firms performance. Evidence from Norwegian banks in crisis.

with Paul Moxnes, Norwegian School of Management BI.

We study the economic performance of Norwegian savings banks during the financial crisis of the 1980s and relate it to the composition/configuration of psychological culture and personality within the banks. According to the "Deep Role model" of Moxnes (1999), we expect that the efficiency of the configurations of personality within the firm depends on the exernal condition. In a situation where structural change is needed (responding to the crisis), the efficient configuration is very different from the one that is efficient under structural stability. We use empirical data collected from banks in the mid-1980s to verify the theory.


Monetary Policy in a Small Open Economy with a Preference for Robustness

with Richard Dennis, Federal Reserve Bank of San Francisco, and Ulf Söderström, Bocconi University. April 2009. Previous versions available as Federal Reserve Bank of San Francisco Working Paper No. 2007-04, November 2006, IGIER Working Paper No. 316, December 2006 and CEPR Discussion Paper No. 6067, January 2007.

We use robust control techniques to study the e ects of model uncertainty on monetary policy in a small-open-economy model estimated on Australian data. Compared to the closed economy, the presence of open-economy transmission channels and shocks
not only produces new trade-offs for monetary policy, but also introduces additional sources of specification errors. We find that price markup shocks in the domestic and import sector are important contributors to volatility in the model, and that the domestic and import sector Phillips curves are particularly vulnerable to model misspecfication. On the other hand, deviations from the interest rate parity condition do not contribute much to overall volatility, nor is the parity condition especially vulnerable to misspecification. Our results suggest that it may be more important for central banks in small open economies to understand the nature of price setting and the effects of exchange rate movements on the economy than the determination of the exchange rate itself.

Keywords: Model uncertainty, Robust control, Model misspecification.
JEL Classification: E52, E61, F41.

The project is supported by the Norwegian Financial Market Fund.