The role of model uncertainty and learning in the U.S. postwar policy response to oil prices
AbstractThis 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 specifically, I examine the robust response to the real price of oil that US monetary authorities would have been recommended to implement in the period1970-2009; 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 regulatorschanging beliefs over dierent 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 modelspriors change the pattern of the relative posterior probabilities, and can thus be attributed to the presence of model uncertainty itself.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 478.
Date of creation: Jun 2010
Date of revision:
Model uncertainty; learning; robust policy; Bayesian model averaging; oil prices;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
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