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# Robustness and macroeconomic policy

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## Abstract

This paper considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that when policymakers 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 worstcase loss these policies could ever impose. I review and evaluate the objections cited by critics of this approach. I further argue 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.

## Suggested Citation

• Gadi Barlevy, 2010. "Robustness and macroeconomic policy," Working Paper Series WP-2010-04, Federal Reserve Bank of Chicago.
• Handle: RePEc:fip:fedhwp:wp-2010-04
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File URL: http://chicagofed.org/digital_assets/publications/working_papers/2010/wp2010_04.pdf

## References listed on IDEAS

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2. 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.
3. Anastasios G. Karantounias with Lars Peter Hansen & Thomas J. Sargent, 2009. "Managing expectations and fiscal policy," FRB Atlanta Working Paper 2009-29, Federal Reserve Bank of Atlanta.
4. Siniscalchi, Marciano, 2009. "Two Out Of Three Ain'T Bad: A Comment On “The Ambiguity Aversion Literature: A Critical Assessment”," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 335-356, November.
5. 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.
6. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-145.
7. Maccheroni, Fabio & Marinacci, Massimo & Rustichini, Aldo, 2006. "Dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 128(1), pages 4-44, May.
8. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
9. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
10. Chow, Gregory C, 1973. "Effect of Uncertainty on Optimal Control Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 632-645, October.
11. 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.
12. 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.
13. Onatski, Alexei & Stock, James H., 2002. "Robust Monetary Policy Under Model Uncertainty In A Small Model Of The U.S. Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 85-110, February.
14. Gadi Barlevy, 2009. "Policymaking under uncertainty: Gradualism and robustness," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-55.
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## Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

1. David Hudgins & Joon Na, 2016. "Entering H $$^{\infty }$$ ∞ -Optimal Control Robustness into a Macroeconomic LQ-Tracking Model," Computational Economics, Springer;Society for Computational Economics, vol. 47(2), pages 121-155, February.
2. Charles Evans & Jonas Fisher & Francois Gourio & Spencer Krane, 2015. "Risk Management for Monetary Policy Near the Zero Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 141-219.
3. Crowley, Patrick M. & Hudgins, David, 2015. "Fiscal policy tracking design in the time–frequency domain using wavelet analysis," Economic Modelling, Elsevier, vol. 51(C), pages 502-514.
4. repec:bis:bisbpc:94-19 is not listed on IDEAS
5. Francois Gourio & Jonas Fisher, 2015. "Risk Management for Monetary Policy at the Zero Lower Bound," 2015 Meeting Papers 665, Society for Economic Dynamics.
6. Mariusz Gorajski, 2016. "Robust monetary policy in a linear model of the polish economy: is the uncertainty in the model responsible for the interest rate smoothing effect?," Lodz Economics Working Papers 1/2016, University of Lodz, Faculty of Economics and Sociology.

### Keywords

Macroeconomics - Econometric models;

### JEL classification:

• D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
• E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

### NEP fields

This paper has been announced in the following NEP Reports:

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