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

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.