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

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  • Francesca Rondina

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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.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 834.10.

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Length: 42
Date of creation: 11 Jun 2010
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Handle: RePEc:aub:autbar:834.10

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Keywords: model uncertainty; learning; robust policy; Bayesian model averaging; oil prices;

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Cited by:
  1. Francesca Rondina, 2010. "Policy Evaluation and Uncertainty About the Effects of Oil Prices on Economic Activity," Working Papers 522, Barcelona Graduate School of Economics.

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