Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Four Types of Ignorance

January 2015
Lars Peter Hansen, Thomas J. Sargent

This paper studies alternative ways of representing uncertainty about a law of motion in a version of a classic macroeconomic targetting problem of Milton Friedman (1953). We study both “unstructured uncertainty” – ignorance of the conditional distribution of the target next period as a function of states and controls – and more “structured uncertainty” – ignorance of the probability distribution of a response coefficient in an otherwise fully trusted specification of the conditional distribution of next period׳s target. We study whether and how different uncertainties affect Friedman׳s advice to be cautious in using a quantitative model to fine tune macroeconomic outcomes.

Publication Type: 
Article
Journal: 
Journal of Monetary Economics
Volume: 
69
Issue Number: 
January
Pages: 
97-113