Alexander Kriwoluzky

Nested models and model uncertainty

Uncertainty about the appropriate choice among nested models is a central 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 some sub-models, e.g. those resulting from zero restrictions. This is especially problematic if a models generalization could be either true progress or the latest fad found to fit the data. We propose a procedure that ensures that the specified set of sub-models is not discarded too easily and thus receives no weight in determining optimal policy. We find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard practice.

Monetary Policy and the Transaction Role of Money in the US

The declining importance of money in transactions can explain the well‐known fact that US interest rate policy was passive in the pre‐Volcker period and active after 1982. We generalise a standard cashless new Keynesian model (Woodford, 2003) by incorporating an explicit transaction role for money. In the pre‐Volcker period, we estimate that money did play an important role and determinacy required a passive interest rate policy. However, after 1982, money no longer played an important role in facilitating transactions. Correspondingly, the conventional view prevails and an active policy ensured equilibrium determinacy.