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Wanting Robustness in Macroeconomics

In: Handbook of Monetary Economics

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  • Hansen, Lars Peter
  • Sargent, Thomas J.

Abstract

Robust control theory is a tool for assessing decision rules when a decision maker distrusts either the specification of transition laws or the distribution of hidden state variables or both. Specification doubts inspire the decision maker to want a decision rule to work well for a [empty set] of models surrounding his approximating stochastic model. We relate robust control theory to the so-called multiplier and constraint preferences that have been used to express ambiguity aversion. Detection error probabilities can be used to discipline empirically plausible amounts of robustness. We describe applications to asset pricing uncertainty premia and design of robust macroeconomic policies.

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This chapter was published in:

  • Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3, January.
    This item is provided by Elsevier in its series Handbook of Monetary Economics with number 3-20.

    Handle: RePEc:eee:monchp:3-20

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    Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

    Related research

    Keywords: Misspecification; Uncertainty; Robustness; Expected Utility; Ambiguity;

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Crazy economic models
      by Mark Buchanan in The Physics of Finance on 2011-10-11 13:27:00
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    Cited by:
    1. Takashi Kamihigashi & John Stachurski, 2014. "Seeking Ergodicity in Dynamic Economies," Discussion Paper Series DP2014-02, Research Institute for Economics & Business Administration, Kobe University.
    2. Xin Li & Borghan Narajabad & Ted Temzelides, 2014. "Robust Dynamic Optimal Taxation and Environmental Externalities," CESifo Working Paper Series 4562, CESifo Group Munich.
    3. Daniel F. Waggoner & Tao Zha, 2012. "Confronting Model Misspecification in Macroeconomics," NBER Working Papers 17791, National Bureau of Economic Research, Inc.

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