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

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  • Rondina, Francesca

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 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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  • Rondina, Francesca, 2012. "The role of model uncertainty and learning in the US postwar policy response to oil prices," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1009-1041.
    • 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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    1. Francesca Rondina, 2010. "Policy evaluation and uncertainty about the effects of oil prices on economic activity," UFAE and IAE Working Papers 855.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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    More about this item

    Keywords

    Model uncertainty; Learning; Robust policy; Bayesian model averaging; Oil prices;
    All these keywords.

    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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