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Fed's Kohn: macro models wrong

Macroeconomic models used by central banks to inform their monetary-policy decisions are clearly inadequate, admitted Donald Kohn, the vice-chairman of the Federal Reserve.

Speaking at the Central Bank of Luxembourg, Kohn said that the current crisis showed that central bankers needed to improve their understanding of the linkages between the financial sector and real activity and the way financial innovation interacted with the channels of credit to affect real economic activity. He said that

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