Wanting Robustness in Macroeconomics

Lars Peter Hansen and Thomas Sargent

Chapter 20 in Handbook of Monetary Economics, 2010, vol. 3, pp 1097-1157 from Elsevier

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.

Keywords: Misspecification; Uncertainty; Robustness; Expected Utility; Ambiguity (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2010
ISBN: 978-0-444-53470-5
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Citations: View citations in EconPapers (42)

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