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Acknowledging Misspecification in Macroeconomic Theory

Author

Listed:
  • Lars Peter Hansen

    (University of Chicago)

  • Thomas J. Sargent

    (Stanford University)

Abstract

We explore methods for confronting model misspecification in macroeconomics. We construct dynamic equilibria in which private agents and policy makers recognize that models are approximations. We explore two generalizations of reational expectations equilibria. In one of these equilibria, decision-makers use dynamic evolution equations that are imperfect statistical approximations, and in the other misspecification is impossible to detect even from infinite samples of time series data. In the first of these equilibria, decision rules are tailored to be robust to the allowable statistical discrepancies. Using frequency domain methods, we show that robust decision-makers treat model misspecification like time series econometricians.

Suggested Citation

  • Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
    • Handle: RePEc:red:issued:v:4:y:2001:i:3:p:519-535
    DOI: 10.1006/redy.2001.0132
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    References listed on IDEAS

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