Acknowledging Misspecification in Macroeconomic Theory

Lars Peter Hansen, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review


    We explore methods for confronting model misspecification in macroeconomics. We construct dynamic equilibria in which private agents and policy makers recognize that models are approximations. We explore two generalizations of rational expectations equilibria. In one of these equilibria, decision-makers use dynamic evolution equations that are imperfect statistical approximations, and in the other misspecification is impossible to detect even from infinite samples of time series data. In the first of these equilibria, decision rules are tailored to be robust to the allowable statistical discrepancies. Using frequency domain methods, we show that robust decision-makers treat model misspecification like time series econometricians.

    Original languageEnglish (US)
    Pages (from-to)519-535
    Number of pages17
    JournalReview of Economic Dynamics
    Issue number3
    StatePublished - Jul 2001


    • Robustness
    • model misspecification
    • monetary policy
    • rational expectations

    ASJC Scopus subject areas

    • Economics and Econometrics


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