By Lars Peter Hansen
The normal thought of choice making less than uncertainty advises the choice maker to shape a statistical version linking results to judgements after which to decide on the optimum distribution of results. This assumes that the choice maker trusts the version thoroughly. yet what may still a call maker do if the version can't be relied on? Lars Hansen and Thomas Sargent, best macroeconomists, push the sector ahead as they set approximately answering this query. They adapt strong keep an eye on suggestions and observe them to economics. through the use of this conception to permit determination makers recognize misspecification in fiscal modeling, the authors strengthen purposes to quite a few difficulties in dynamic macroeconomics. Technical, rigorous, and self-contained, this ebook might be precious for macroeconomists who search to enhance the robustness of decision-making approaches.
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Extra resources for Robustness
Is max-min too cautious? Our doubts are traitors, And make us lose the good we oft might win, By fearing to attempt. 1 protects us against the objection that the maxmin expected utility theory embedded in robust control theory is too cautious because, by acting as if he believed the worst-case model, the decision maker puts too much weight on a “very unlikely” scenario. 28 We choose θ so that the entropy ball that surrounds the decision maker’s approximating model in 26 See Sims (1971) and Diaconis and Freedman (1986) for arguments that forming an appropriate prior is diﬃcult when the space of submodels and the dimensions of parameter spaces are very large.
1 ) satisfy some stabilizability and detectability assumptions set forth in chapter 4. 1 ), y0 is given, E denotes the mathematical expectation operator evaluated with respect to the distribution of ˇ, and E0 denotes the mathematical expectation conditional on time 0 information, namely, the state y0 . 7) where ˇ is a random vector with mean zero and identity variance matrix. Subject to assumptions about A, B, R, Q, β to be described in chapter 4, some salient facts about the optimal linear regulator are the following: 6 The zero-sum feature perfectly misaligns the preferences of the two players and thereby renders timing protocols irrelevant.
We describe the basic theory within a class of linear quadratic general equilibrium models and then a calibrated version of the permanent income model of chapter 10. A remarkable observational equivalence result identiﬁes a locus of pairs of discount factors and robustness multipliers, all of which imply identical real allocations. 38 Nevertheless, prices of risky assets vary substantially across these pairs. In chapter 14, we revisit some quantitative ﬁndings of Tallarini (2000) and reinterpret asset pricing patterns that he imputed to very high risk aversion in terms of a plausible fear of model misspeciﬁcation.