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The role of model uncertainty and learning in the US postwar policy response to oil prices

  • Rondina, Francesca

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 specifically, using postwar US data, I examine the evolution of the policy recommendations originating from an optimal linear regulator problem that encompasses model uncertainty and learning, as proposed by Cogley and Sargent (2005b). In this environment, I find that one of the underlying models dominates the robust interest rate response to oil prices, and I show that this result is due to the instability of this specification in the sample period under analysis.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 7 ()
Pages: 1009-1041

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:7:p:1009-1041
DOI: 10.1016/j.jedc.2012.01.013
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