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Wanting Robustness in Macroeconomics

In: Handbook of Monetary Economics

Author

Listed:
  • 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.

Suggested Citation

  • Hansen, Lars Peter & Sargent, Thomas J., 2010. "Wanting Robustness in Macroeconomics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 20, pages 1097-1157, Elsevier.
    • Handle: RePEc:eee:monchp:3-20
    as

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    Citations

    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 18:27:00

    Citations

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    Cited by:

    1. Xin Li & Borghan N. Narajabad & Theodosios Temzelides, 2014. "Robust Dynamic Optimal Taxation and Environmental Externalities," Finance and Economics Discussion Series 2014-75, Board of Governors of the Federal Reserve System (U.S.).
    2. Kamihigashi, Takashi & Stachurski, John, 2016. "Seeking ergodicity in dynamic economies," Journal of Economic Theory, Elsevier, vol. 163(C), pages 900-924.
    3. Chemla, Gilles & Hennessy, Christopher, 2019. "Equilibrium Counterfactuals," CEPR Discussion Papers 14146, C.E.P.R. Discussion Papers.
    4. Meyer-Gohde, Alexander, 2019. "Generalized entropy and model uncertainty," Journal of Economic Theory, Elsevier, vol. 183(C), pages 312-343.
    5. Hill, Brian & Michalski, Tomasz, 2018. "Risk versus ambiguity and international security design," Journal of International Economics, Elsevier, vol. 113(C), pages 74-105.
    6. Joshua Aizenman & Eduardo Cavallo & Ilan Noy, 2015. "Precautionary Strategies and Household Saving," Open Economies Review, Springer, vol. 26(5), pages 911-939, November.
    7. Haven, Emmanuel & Sozzo, Sandro, 2016. "A generalized probability framework to model economic agents' decisions under uncertainty," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 297-303.
    8. Joshua Aizenman & Yin-Wong Cheung & Hiro Ito, 2019. "The Interest Rate Effect on Private Saving: Alternative Perspectives," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-37, February.
    9. repec:ipg:wpaper:2014-086 is not listed on IDEAS
    10. Bask, Mikael & Proaño, Christian R., 2016. "Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 112-126.
    11. Waggoner, Daniel F. & Zha, Tao, 2012. "Confronting model misspecification in macroeconomics," Journal of Econometrics, Elsevier, vol. 171(2), pages 167-184.
    12. Grigoli, Francesco & Herman, Alexander & Schmidt-Hebbel, Klaus, 2018. "Saving in the world," World Development, Elsevier, vol. 104(C), pages 257-270.

    More about this item

    Keywords

    Misspecification; Uncertainty; Robustness; Expected Utility; Ambiguity;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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