Wanting robustness in macroeconomics

Lars Peter Hansen, Thomas J. Sargent

    Research output: Contribution to journalArticle

    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 Ø 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.

    Original languageEnglish (US)
    Pages (from-to)1097-1157
    Number of pages61
    JournalHandbook of Monetary Economics
    Volume3
    Issue numberC
    DOIs
    StatePublished - 2010

    Keywords

    • Ambiguity
    • Expected Utility
    • Misspecification
    • Robustness
    • Uncertainty

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics
    • Economics, Econometrics and Finance (miscellaneous)

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