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Policy Evaluation and Uncertainty About the Effects of Oil Prices on Economic Activity

Author

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  • Francesca Rondina
Abstract
This paper addresses the issue of policy evaluation in a context in which policymakers are uncertain about the e€ects 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 di€erent 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 di€erent specifcations. I show that the existence of plausible alternative representations of the economy forces the policy maker 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 out performed 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.

Suggested Citation

  • Francesca Rondina, 2010. "Policy Evaluation and Uncertainty About the Effects of Oil Prices on Economic Activity," Working Papers 522, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:522
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    References listed on IDEAS

    as
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Model uncertainty; robust policy; Bayesian model averaging; minimax; oil prices;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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