Research Publication

December 2010 | Chapter

Wanting Robustness in Macroeconomics

Lars Peter Hansen, Thomas J. Sargent

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 ? 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.

Pages: 1097-1157|Title of book: Handbook of Monetary Economics|Editor(s): Benjamin Friedman, Michael Woodford|Place of Publication: Burlington, MA|Publisher: Elsevier Science|Tags: Risk, Robustness and Ambiguity|Export BibTeX >
  title={Wanting Robustness in Macroeconomics},
  author={Hansen, Lars Peter and Sargent, Thomas J. and others},
  journal={Manuscript, Department of Economics, Stanford University. Website: www. stanford. edu/sargent},