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

have occurred in succession. each is caused by as yet unidentified mistakes. as mistakes are unavoidable, the key is to learn how to live with the instability or turbulences, and consequently draw lessons to improve the financial system. as a matter of fact, the financial authorities have introduced significant and substantive policy or institutional improvements after every crisis. by reviewing the above - mentioned turbulences in the u. s., we get a rough idea of how improvements have occurred. in the period of high inflation through 1970s and 80s, the role, independence and governance of the central bank were carefully studied. as a result, operations of the central bank made lots of improvements. we can read about these developments in the biography of paul volker and the autobiography of alan greenspan. after the black monday in 1987, it became known to the general public how the central bank used liquidity management in a flexible manner in response to the crisis that might otherwise spread quickly. after the s & l crisis between 1980 and early 1990s was resolved, the regulators carefully examined the potential moral hazard in the deposit insurance scheme. in 1991, the federal deposit insurance company improvement act was adopted to strengthen the supervision function of the fdic, establish an arrangement for prompt corrective actions and adopt differentiated premiums to mitigate adverse selection and moral hazards. after the long term capital management problem, the financial sector watched the leverage ratio of hedge funds more carefully and urged commercial institutions, commercial banks in particular, to strengthen internal control over the leverage ratio. with the burst of nasdaq bubbles, people began to get a taste of bubbles and their harms. in the aftermath of enron and worldcom scandals, sarbanes - oxley act was passed. though some may view a small number of its codes as over reaction, the act contains remarkable improvements in response to the problems of the listed companies. a lot of reflection has been seen in the recent turbulence triggered by subprime mortgage. as we usually say in china, there is a good chance of turning bad things into good ones. parsing china's experience looking back at china's economic and financial development since the period of opening up and reform, a similar picture emerges in which we could see financial distresses, big or small, always occurred. in 1985, china experienced a high inflation rate of 8. 8 percent. in the anti - inflation process, the decision - makers learned how to build a two - tier banking system. the blind optimism about the