Norges Bank

Staff Memo

On the purpose of models - The Norges Bank experience

Karsten R. Gerdrup and Jon Nicolaisen, Monetary Policy
Staff Memo

Macroeconomic models are important ingredients in the monetary policy process, and, in the Norwegian case, projecting a forward interest rate path. In this paper we argue that when deciding on a model strategy, it is crucial to consider the purpose of models. If the purpose is to understand basic mechanisms in the economy and implications of economic policy, we need a set of models that highlight these features. If the purpose is to forecast short-term developments, a different set of models may be required. Given the complexity of the real world, we argue that it is better to provide the policymakers with a good characterization of uncertainty instead of only providing point forecasts, i.e. it is better to be "roughly right" than "exactly wrong". A robust strategy for handling uncertainty should be an inherent part of the preferred system of models.

Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.

ISSN 1504-2596 (online)

Published 5 July 2011 14:30
Published 5 July 2011 14:30