Robustness and U.S. Monetary Policy Experimentation

29 Pages Posted: 18 Sep 2008

See all articles by Timothy Cogley

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: September, 11 2008

Abstract

We study how a concern for robustness modifies a policy maker's incentive to experiment. A policy maker has a prior over two submodels of inflation-unemployment dynamics. One submodel implies an exploitable trade-off, the other does not. Bayes' law gives the policy maker an incentive to experiment. The policy maker fears that both submodels and his prior probability distribution over them are misspecified. We compute decision rules that are robust to misspecifications of each submodel and of the prior distribution over sub-models. We compare robust rules to ones that Cogley, Colacito, and Sargent (2007) computed assuming that the models and the prior distribution are correctly specified. We explain how the policy maker's desires to protect against misspecifications of the submodels, on the one hand, and misspecifications of the prior over them, on the other, have different effects on the decision rule.

Keywords: Learning, model uncertainty, Bayes' law, Phillips curve, experimentation, robustness, pessimism, entropy

Suggested Citation

Cogley, Timothy and Colacito, Riccardo and Hansen, Lars Peter and Sargent, Thomas J., Robustness and U.S. Monetary Policy Experimentation (September, 11 2008). Journal of Money, Credit, and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1267033

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
530-752-1581 (Phone)
530-752-9382 (Fax)

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lars Peter Hansen

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-3548 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
112
Abstract Views
3,991
rank
297,879
PlumX Metrics