Robust preference expansions

Lars Hansen and Jaroslav Borovička
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Lars Hansen: University of Chicago

No 1199, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We propose an approximation method for solving dynamic stochastic general equilibrium models in which agents are concerned about model misspecification. The method relies on a perturbation that treats this robust concern as a first-order concept that is preserved as the volatility of the shocks vanishes. The approximation has a clear economic interpretation and generates solutions with consequences of robust preferences that standard perturbation methods only capture using higher-order terms.

Date: 2013
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