Model Uncertainty in Economics - Modelbase team contributes chapter to Oxford Handbook on Central Banking

Since the financial crisis, macroeconomic models have made enormous progress. In a paper published in the new “Oxford Handbook of the Economics of Central Banking” Michael Binder, Philipp Lieberknecht, Jorge Quintana and Volker Wieland draw a comparison of the new generation of macroeconomic models that also take into account the financial sector and show the consequences for central banks.

The “Oxford Handbook of the Economics of Central Banking” aims to provide an overview about current and future challenges faced by central banks in the conduct of monetary policy and in the search for the maintenance of financial system stability. The handbook edited by David G. Mayes, Pierre L. Siklos, and Jan-Egbert Sturm covers the independence of central banks, central bank communication, balance-sheet management, the transmission mechanisms and the macroprudential framework.

The comparative research approach of Binder, Lieberknecht, Quintana and Wieland is based on the open platform Wieland has developed with his team: the Macroeconomic Model Data Base (MMB). On the interactive platform on, which currently offers 128 models, researchers can add models and scenarios. Moreover, they can analyze in various models at the same time the consequences of a cut or a rise in interest rates, a tax reform or a stimulus package. Models of the Federal Reserve, the European Central Bank, the European Commission, the International Monetary Fund as well as the central banks of Sweden, Canada and Chile are integrated on the platform. The database now has been extended by some structural models featuring unconventional monetary policy.

The authors document a higher degree of model uncertainty relative to earlier generations of these models. In particular, policy transmission is highly heterogeneous across types of financial frictions and monetary policies cause larger effects, on average.

Michael Binder, Philipp Lieberknecht, Jorge Quintana and Volker Wieland
"Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions"

published as IMFS Working Paper 114 (PDF)

More information:
The Oxford Handbook of the Economics of Central Banking