Robustness and U.S. Monetary Policy Experimentation

Timothy Cogley, Riccardo Colacito, Lars Peter Hansen, Thomas Sargent

    Research output: Contribution to journalArticle

    Abstract

    We study how a concern for robustness modifies a policymaker's incentive to experiment. A policymaker 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 policymaker an incentive to experiment. The policymaker 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 submodels. 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 policymaker'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.

    Original languageEnglish (US)
    Pages (from-to)1599-1623
    Number of pages25
    JournalJournal of Money, Credit and Banking
    Volume40
    Issue number8
    DOIs
    StatePublished - Dec 2008

    Fingerprint

    Experimentation
    Monetary policy
    Politicians
    Robustness
    Misspecification
    Experiment
    Decision rules
    Incentives
    Inflation
    Probability distribution
    Trade-offs
    Unemployment dynamics

    Keywords

    • Bayes' law
    • Entropy
    • Experimentation
    • Learning
    • Model uncertainty
    • Pessimism
    • Phillips curve
    • Robustness

    ASJC Scopus subject areas

    • Finance
    • Accounting
    • Economics and Econometrics

    Cite this

    Robustness and U.S. Monetary Policy Experimentation. / Cogley, Timothy; Colacito, Riccardo; Hansen, Lars Peter; Sargent, Thomas.

    In: Journal of Money, Credit and Banking, Vol. 40, No. 8, 12.2008, p. 1599-1623.

    Research output: Contribution to journalArticle

    Cogley, T, Colacito, R, Hansen, LP & Sargent, T 2008, 'Robustness and U.S. Monetary Policy Experimentation', Journal of Money, Credit and Banking, vol. 40, no. 8, pp. 1599-1623. https://doi.org/10.1111/j.1538-4616.2008.00176.x
    Cogley, Timothy ; Colacito, Riccardo ; Hansen, Lars Peter ; Sargent, Thomas. / Robustness and U.S. Monetary Policy Experimentation. In: Journal of Money, Credit and Banking. 2008 ; Vol. 40, No. 8. pp. 1599-1623.
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