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Robustness and Macroeconomic Policy

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  • Gadi Barlevy

    ()
    (Economic Research, Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

Abstract

This review considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that, when policy makers are uncertain about the environment they face and find it difficult to assign precise probabilities to the alternative scenarios that may characterize this environment, they should design policies to be robust in the sense that they minimize the worst-case loss these policies could ever impose. I review and evaluate the objections cited by critics of this approach. I argue further that, contrary to what some have inferred, concern about worst-case scenarios does not always lead to policies that respond more aggressively to incoming news than the optimal policy would respond absent any uncertainty.

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File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-061109-080355
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Bibliographic Info

Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 3 (2011)
Issue (Month): 1 (09)
Pages: 1-24

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Handle: RePEc:anr:reveco:v:3:y:2011:p:1-24

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Related research

Keywords: robust control; uncertainty; ambiguity; attenuation principle;

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References

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  1. Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," Working Paper Series in Economics and Finance 308, Stockholm School of Economics.
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  4. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June.
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