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 study monetary policy under uncertainty. A policy which ameliorates a worst case may differ from a policy which maximizes robustness and satisfices the performance. The former strategy is min-maxing and the latter strategy is robust-satisficing. We show an “observational equivalence”...

We investigate empirically whether a central bank can promote financial stability by stabilizing inflation and output, and whether additional stabilization of asset prices and credit growth would enhance financial stability in particular. We employ an econometric model of the Norwegian economy...

We investigate the economic significance of trading off empirical validity of models against other desirable model properties. Our investigation is based on three alternative econometric systems of the supply side, in a model that can be used to discuss optimal monetary policy in Norway. Our...

This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign...

We employ a new decision-theoretic approach to dealing with Knightian uncertainty based on Simon's bounded rationality. The basic tool of this approach is a quantitative answer to the question: For a specified policy, among a set of policies, how much can our assumptions regarding e.g. model and...

Previous empirical studies have suggested an ambiguous relationship between crude oil prices and exchange rates. In contrast to these studies, we explore the possibility of a non-linear relationship between oil prices and the Norwegian exchange rate. We reveal a negative relationship between oil...

This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special...

We investigate the economic significance of trading off empirical validity of models against other desirable model properties, and the potential loss from ’overestimating’ model uncertainty and basing monetary policy on a relatively robust model, or on a suite of models. We find that...