The role of model uncertainty and learning in the U.S. postwar policy response to oil prices

Francesca Rondina

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper studies optimal monetary policy in a framework that explicitly accounts for policymakers' uncertainty about the channels of transmission of oil prices into the economy. More specfically, I examine the robust response to the real price of oil that US monetary authorities would have been recommended to implement in the period 1970 2009; had they used the approach proposed by Cogley and Sargent (2005b) to incorporate model uncertainty and learning into policy decisions. In this context, I investigate the extent to which regulator' changing beliefs over different models of the economy play a role in the policy selection process. The main conclusion of this work is that, in the specific environment under analysis, one of the underlying models dominates the optimal interest rate response to oil prices. This result persists even when alternative assumptions on the model's priors change the pattern of the relative posterior probabilities, and can thus be attributed to the presence of model uncertainty itself.

Keywords: model uncertainty; learning; robust policy; Bayesian model averaging; oil prices (search for similar items in EconPapers)
JEL-codes: C52 E43 E58 E65 (search for similar items in EconPapers)
Pages: 42
Date: 2010-06-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The role of model uncertainty and learning in the US postwar policy response to oil prices (2012)
Working Paper: The role of model uncertainty and learning in the U.S. postwar policy response to oil prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:834.10

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