An Escape Time Interpretation of Robust Control

Inkoo Cho and Kenneth Kasa

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: This paper studies the problem of an agent who wants to prevent the state from exceeding a critical threshold. Even though the agent is presumed to know the model, the optimal policy is computed by solving a conventional robust control problem. That is, robustness is induced here by objectives rather than uncertainty, and so is an example of the duality between risk-sensitivity and robustness. However, here the agent only incurs costs upon escape to a critical region, not during ‘normal times’. We argue this is often a more realistic model of macroeconomic policymaking.

Keywords: robust control; large deviations (search for similar items in EconPapers)
JEL-codes: C61 D81 (search for similar items in EconPapers)
Pages: 13
Date: 2013-05
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Journal Article: An escape time interpretation of robust control (2014)
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