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Policy evaluation and uncertainty about the effects of oil prices on economic activity

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 addresses the issue of policy evaluation in a context in which policymakers are uncertain about the effects of oil prices on economic performance. I consider models of the economy inspired by Solow (1980), Blanchard and Gali (2007), Kim and Loungani (1992) and Hamilton (1983, 2005), which incorporate different assumptions on the channels through which oil prices have an impact on economic activity. I first study the characteristics of the model space and I analyze the likelihood of the different specifications. I show that the existence of plausible alternative representations of the economy forces the policymaker to face the problem of model uncertainty. Then, I use the Bayesian approach proposed by Brock, Durlauf and West (2003, 2007) and the minimax approach developed by Hansen and Sargent (2008) to integrate this form of uncertainty into policy evaluation. I find that, in the environment under analysis, the standard Taylor rule is outperformed under a number of criteria by alternative simple rules in which policymakers introduce persistence in the policy instrument and respond to changes in the real price of oil.

Keywords: model uncertainty; robust policy; Bayesian model averaging; minimax; oil prices. (search for similar items in EconPapers)
JEL-codes: C52 E52 E58 (search for similar items in EconPapers)
Pages: 49
Date: 2010-11-24
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (2) Track citations by RSS feed

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Working Paper: Policy Evaluation and Uncertainty About the Effects of Oil Prices on Economic Activity (2010) Downloads
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