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Robustness and macroeconomic policy


  • Gadi Barlevy


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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    References listed on IDEAS

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    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.
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    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.
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    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.
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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.

    More about this item


    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

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