Model selection for monetary policy analysis – Importance of empirical validity

We investigate the importance of employing a valid model for monetary policy analysis. Specifically, we investigate the economic significance of differences in specification and empirical validity of models. We consider three alternative econometric models of wage and price inflation in Norway. We find that differences in model specification as well as in parameter estimates across models can lead to widely different policy recommendations. We also find that the potential loss from basing monetary policy on a model that may be invalid, or on a suite of models, even when it contains the valid model, can be substantial, also when gradualism is exercised as a concession to model uncertainty. Furthermore, possible losses from such a practice appear to be greater than possible losses from failing to choose the optimal policy horizon to a shock within the framework of a valid model. Our results substantiate the view that a model for policy analysis should necessarily be empirically valid and caution against compromising this property for other desirable model properties, including robustness.Model uncertainty; Econometric modelling; Economic significance; Robust monetary policy.

Valuing Farmland Protection with Choice Experiments That Incorporate Preference Heterogeneity: Does Policy Guidance Depend On the Econometric Fine Print?

Although mixed logit models are common in stated preference applications, resulting welfare estimates can be sensitive to minor changes in specification. This can be of critical relevance for policy and welfare analysis, particularly if policymakers are unaware of practical implications. Drawing from an application to agricultural conservation in Georgia, this paper quantifies the sensitivity of welfare estimates to common variations in mixed logit specification and assesses practical implications for policy guidance. Results suggest that practitioners may wish to reevaluate modeling and reporting procedures to reflect the welfare and policy implications of common but often unnoticed variations in model specification.Willingness to Pay, Conservation Easement, PACE, Mixed Logit, Stated Preference, Environmental Economics and Policy, Land Economics/Use, Research Methods/ Statistical Methods, Q24, Q51,

Robust Control of Uncertain Markov Decision Processes with Temporal Logic Specifications

We present a method for designing robust controllers for dynamical systems with linear temporal logic specifications. We abstract the original system by a finite Markov Decision Process (MDP) that has transition probabilities in a specified uncertainty set. A robust control policy for the MDP is generated that maximizes the worst-case probability of satisfying the specification over all transition probabilities in the uncertainty set. To do this, we use a procedure from probabilistic model checking to combine the system model with an automaton representing the specification. This new MDP is then transformed into an equivalent form that satisfies assumptions for stochastic shortest path dynamic programming. A robust version of dynamic programming allows us to solve for a $\epsilon$-suboptimal robust control policy with time complexity $O(\log 1/\epsilon)$ times that for the non-robust case. We then implement this control policy on the original dynamical system

Accounting for WTP/WTA discrepancy in discrete choice models: Discussion of policy implications based on two freight transport stated choice experiments

A key input in cost-benefit analysis is represented by the marginal rate of substitution which expresses the willingness to pay, or its counterpart willingness to accept, for both market and non-market goods. The consistent discrepancy between these two measures observed in the literature suggests the need to estimate reference dependent models able to capturing loss aversion by distinguishing the value attached to a gain from the value attached to a loss according to reference dependent theory. This paper proposes a comparison of willingness to pay and willingness to accept measures estimated from models with both symmetric and reference dependent utility specifications within two different freight transport stated choice experiments. The results show that the reference dependent specification outperforms the symmetric specification and they prove the robustness of reference dependent specification over datasets designed according different attributes levels ranges. Moreover we demonstrate the policy relevance of asymmetric specifications illustrating the strong implications for cost-benefit analysis in two case studies.WTP/WTA discrepancy, freight choice, policy evaluation

Robot eye-hand coordination learning by watching human demonstrations: a task function approximation approach

We present a robot eye-hand coordination learning method that can directly learn visual task specification by watching human demonstrations. Task specification is represented as a task function, which is learned using inverse reinforcement learning(IRL) by inferring differential rewards between state changes. The learned task function is then used as continuous feedbacks in an uncalibrated visual servoing(UVS) controller designed for the execution phase. Our proposed method can directly learn from raw videos, which removes the need for hand-engineered task specification. It can also provide task interpretability by directly approximating the task function. Besides, benefiting from the use of a traditional UVS controller, our training process is efficient and the learned policy is independent from a particular robot platform. Various experiments were designed to show that, for a certain DOF task, our method can adapt to task/environment variances in target positions, backgrounds, illuminations, and occlusions without prior retraining.Comment: Accepted in ICRA 201

Estimation of monetary policy preferences in a forward-looking model: a Bayesian approach. NBB Working Papers No. 129, 13 March 2008

In this paper, we adopt a Bayesian approach to estimating monetary policy preference parameters in a general equilibrium framework. We start out from the model presented by Smets and Wouters (2003) for the euro area, where, in the original set-up, monetary policy behaviour is described by an empirical rule. We abandon this way of representing monetary policy behaviour and instead assume that monetary policy authorities optimise an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, the output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be important target variables as well, albeit to a lesser extent. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialise our estimates by considering a pre-sample period of 40 quarters. This enables an empirical approach to the timeless perspective framework

Sticky-price models and the natural rate hypothesis

A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.Monetary policy ; Prices

Total Economic Values for Coastal and Marine Wildlife: Specification, Validity and Valuation Issues

Benefit-cost analysis of coastal and marine wildlife management programs requires that economic benefits be monetized for comparison with the costs of preservation. Without explicit measurement and consideration of nonuse values, benefits may be underestimated and resources devoted to wildlife programs may be underallocated. Using data from a contingent valuation survey of nongame wildlife programs in coastal North Carolina, this paper provides additional evidence that total economic values under uncertainty for wildlife are theoretically valid. Specification error is found for valuation models which do not include measures of uncertainty. Specification error can lead to errors in benefit estimation.contingent valuation, option price, specification, validity, Environmental Economics and Policy, Research Methods/ Statistical Methods,