Jan F Qvigstad: Seminar on Bayesian Econometrics (ESOBE) - opening
remarks
Opening remarks by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of
Norway), at the fourth annual meeting of the European Seminar on Bayesian Econometrics
(ESOBE), Norges Bank, Oslo, 22 August 2013.
* * *
Good morning everyone!
It is a privilege for me to welcome you to this year's European Seminar on Bayesian
Econometrics, which has attracted the interest of such a distinguished group of international
scholars. I would like to extend a special welcome to those of you who have traveled far in
order to be here today.
As a practitioner of economic policy, I have experienced the use of economic models for
almost half a century. Back in the late 1970s, the Norwegian Ministry of Finance used a large
input-output model to calculate the effects of fiscal policy. Somewhat contrary to common
sense - even then - the model suggested that an increase in government spending would
reduce inflation. To remedy this obvious mistake, we calibrated a new model - using our
priors on critical parameters - to get results that were more consistent with our experience.
The lesson I take away from this is the following: To be useful, models need to be consistent
with the view of the world that we apply to policy. This consistency principle, in my view, lies
at the heart of the progress made possible by Bayesian modeling.
Advances in the last two decades have made Bayesian econometrics a key tool for central
banks. Norges Bank has benefited greatly from this, and two of our most important policy
tools are results of such advances. NEMO (Norwegian Economy Model) is our estimated
DSGE model. The model is based on international research and model development over
the past 20 years. We use it to produce forecasts and guide monetary policy analysis. This
year, the hype is "forward guidance". The Fed does it, the Bank of England does it, and the
ECB also. We have done it since 2005. We publish forecasts of the key policy interest rate
and NEMO has been essential for the construction and, above all, explanation. When I
describe Norges Bank's policy decision at press conferences, I often refer to NEMO
equations in order to explain our decisions.
Our second key policy tool is our System of Averaging Models, SAM. The short-term forecast
from SAM is the basis for the initial conditions when we use NEMO and when we make our
policy decisions - and hence of core importance to monetary policy. Theory and experience
suggest that a weighted average of forecasts from different models is often more accurate
than forecasts provided by individual models. Norges Bank's short-term forecasts are based
on combinations of statistical and econometric models, where each model is assigned a
probability depending on past density forecasting performances. Currently, we are working
on how to incorporate mechanically density predictions from SAM into NEMO.
The few examples that I have just described show how research on macro modeling and
forecasting is important for our work. We are well aware that there will always be ample room
for improvement in our toolbox, and we are fortunate to have such prominent speakers with
us here today. This workshop is a great opportunity for us to become familiar with recent
advances in Bayesian econometrics.
In addition to the pleasure of the scholarly discourse, I also hope you will have the
opportunity to enjoy Oslo.