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Policymaking under uncertainty: Gradualism and robustness

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  • Gadi Barlevy

Abstract

Some economists have recommended the robust control approach to the formulation of monetary policy under uncertainty when policymakers cannot attach probabilities to the scenarios that concern them. One critique of this approach is that it seems to imply aggressive policies under uncertainty, contrary to the conventional wisdom of acting more gradually in an uncertain environment. This article argues that aggressiveness is not a generic feature of robust control.

Suggested Citation

  • Gadi Barlevy, 2009. "Policymaking under uncertainty: Gradualism and robustness," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-55.
  • Handle: RePEc:fip:fedhep:y:2009:i:qii:p:38-55:n:v.33no.2
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    1. Stan Žaković & Volker Wieland & Berc Rustem, 2007. "Stochastic Optimization and Worst-Case Analysis in Monetary Policy Design," Computational Economics, Springer;Society for Computational Economics, vol. 30(4), pages 329-347, November.
    2. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    3. repec:fip:fedgsq:y:2007:i:oct19 is not listed on IDEAS
    4. Manski, Charles F., 2000. "Identification problems and decisions under ambiguity: Empirical analysis of treatment response and normative analysis of treatment choice," Journal of Econometrics, Elsevier, vol. 95(2), pages 415-442, April.
    5. Christopher A. Sims, 2001. "Pitfalls of a Minimax Approach to Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 51-54, May.
    6. Maccheroni, Fabio & Marinacci, Massimo & Rustichini, Aldo, 2006. "Dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 128(1), pages 4-44, May.
    7. Ben S. Bernanke, 2007. "Monetary policy under uncertainty," Speech 327, Board of Governors of the Federal Reserve System (U.S.).
    8. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
    9. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
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    Cited by:

    1. Julian A. Parra-Polania & Carmiña O. Vargas, 2014. "Changes in GDP’s measurement error volatility and response of the monetary policy rate: Two approaches," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(75), pages 41-47, December.
    2. Gadi Barlevy, 2011. "Robustness and Macroeconomic Policy," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 1-24, September.
    3. Martin Ellison & Thomas J. Sargent, 2012. "A Defense Of The Fomc," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1047-1065, November.
    4. Gerke, Rafael & Hammermann, Felix & Lewis, Vivien, 2012. "Robust monetary policy in a model with financial distress," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 318-325.
    5. Hansen, Lars Peter & Sargent, Thomas J., 2015. "Four types of ignorance," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 97-113.
    6. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
    7. Saleem Bahaj & Angus Foulis, 2017. "Macroprodential Policy under Uncertainty," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 119-154, September.
    8. Christian Aubin & Ibrahima Diouf & Dominique Pepin, 2010. "Inertie De La Politique Monétaire Dans La Zone Euro : Le Rôle De L'Hétérogénéité," Post-Print hal-00960030, HAL.
    9. Ferrière, Axelle & Karantounias, Anastasios G., 2016. "Fiscal austerity in ambiguous times," FRB Atlanta Working Paper 2016-6, Federal Reserve Bank of Atlanta.

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