Robustness and macroeconomic policy
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.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834|
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rudebusch, G.D. & Svensson, L.E.O., 1998.
"Policy Rules for Inflation Targeting,"
637, Stockholm - International Economic Studies.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- 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.
- Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
- Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
- Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
- Tomasz Strzalecki, .
"Axiomatic Foundations of Multiplier Preferences,"
8239, Harvard University OpenScholar.
- 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.
- Maccheroni, Fabio & Marinacci, Massimo & Rustichini, Aldo, 2006.
"Dynamic variational preferences,"
Journal of Economic Theory,
Elsevier, vol. 128(1), pages 4-44, May.
- Alexei Onatski & James H. Stock, 1999.
"Robust monetary policy under model uncertainty in a small model of the U.S. economy,"
Federal Reserve Bank of San Francisco.
- 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.
- Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
- Ellison, Martin & Sargent, Thomas J, 2009.
"A defence of the FOMC,"
CEPR Discussion Papers
7510, C.E.P.R. Discussion Papers.
- Söderström, Ulf, 1999.
"Monetary policy with uncertain parameters,"
Working Paper Series
83, Sveriges Riksbank (Central Bank of Sweden).
- Söderström, Ulf, 2000. "Monetary policy with uncertain parameters," Working Paper Series 0013, European Central Bank.
- Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," SSE/EFI Working Paper Series in Economics and Finance 308, Stockholm School of Economics.
- 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.
- 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.
- Gadi Barlevy, 2009. "Policymaking under uncertainty: Gradualism and robustness," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-55.
- 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.
- Robert J. Tetlow & Peter von zur Muehlen, 2000. "Robust monetary policy with misspecified models: does model uncertainty always call for attenuated policy?," Finance and Economics Discussion Series 2000-28, Board of Governors of the Federal Reserve System (U.S.).
- Epstein, Larry G. & Schneider, Martin, 2003.
Journal of Economic Theory,
Elsevier, vol. 113(1), pages 1-31, November.
- 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 632-45, October.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-2010-04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.