Wanting Robustness in Macroeconomics

December 2010
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.

Publication Type: 
Title of Book: 
Handbook of Monetary Economics
Benjamin Friedman, Michael Woodford
Place of Publication: 
Burlington, MA
Elsevier Science