Robustness

by Lars Peter Hansen, Thomas J. Sargent

Overview

The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted?


Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics.


Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.

Product Details

ISBN-13:	9780691170978
Publisher:	Princeton University Press
Publication date:	06/28/2016
Edition description:	Reprint
Pages:	464
Product dimensions:	7.00(w) x 9.90(h) x 1.00(d)

About the Author

Lars Peter Hansen is the Homer J. Livingston Distinguished Service Professor in the Department of Economics at the University of Chicago. Thomas J. Sargent is professor of economics at New York University and senior fellow at the Hoover Institution. He is the author of The Conquest of American Inflation and the coauthor of The Big Problem of Small Change (both Princeton).

Table of Contents

Preface xv

Acknowledgments xvii




Part I: Motivation and main ideas

Chapter 1: Introduction 3

Chapter 2: Basic ideas and methods 25

Chapter 3: A stochastic formulation 53





Part II: Standard control and filtering

Chapter 4: Linear control theory 67

Chapter 5: The Kalman filter 103





Part III: Robust control

Chapter 6: Static multiplier and constraint games 119

Chapter 7: Time domain games for attaining robustness 139

Chapter 8: Frequency domain games and criteria for robustness 173

Chapter 9: Calibrating misspecification fears with detection error probabilities 213

Chapter 10: A permanent income model 223





Part IV: Multi-agent problems

Chapter 11: Competitive equilibria without robustness 253

Chapter 12: Competitive equilibria with robustness 271

Chapter 13: Asset pricing 295

Chapter 14: Risk sensitivity, model uncertainty, and asset pricing 307

Chapter 15: Markov perfect equilibria with robustness 327

Chapter 16: Robustness in forward-looking models 333





Part V: Robust estimation and filtering

Chapter 17: Robust filtering with commitment 359

Chapter 18: Robust filtering without commitment 383





Part VI: Extensions

Chapter 19: Alternative approaches 403





References 413

Index 427

Author Index 431

Matlab Index 435

What People are Saying About This

Prescott

Best policies can be evaluated, in theory at least, given an economy. But macroeconomists have only model economies at their disposal and necessarily these economies are abstractions. A concern then is that the model economy used to evaluate policy will provide poor guidance in practice. This leads to the search for policy that performs well for a broad class of economies. This is what robust control theory is all about. In this book, Hansen and Sargent greatly extend robust control theory to make it useful in the macro policy setting. This is a major contribution to macroeconomics.
— Edward C. Prescott, Nobel Prize-winning economist

Itzhak Gilboa

The pathbreaking work of Hansen and Sargent extends macroeconomic theory beyond the Bayesian paradigm. They retain the analytical power of the classical mathematical models while adding to them the subtleties of an uncertain world. Using tools from robust control theory, they present a model in which an individual's probabilistic belief is subject to noise, or to uncertainty, and redo much of macroeconomic theory under this assumption.
— Itzhak Gilboa, Tel Aviv University

David Kreps

Hansen and Sargent were among the cadre of macroeconomists who challenged conventional (Keynesian) wisdom, and they are at it again, in a book that sparkles with ideas and analysis of fundamental problems in dynamic macroeconomics. The specific results reported here are, of course, interesting but this book is so much more: for young and ambitious economic theorists, this book is like the California gold fields in 1848.
— David Kreps, Stanford University

From the Publisher

"Best policies can be evaluated, in theory at least, given an economy. But macroeconomists have only model economies at their disposal and necessarily these economies are abstractions. A concern then is that the model economy used to evaluate policy will provide poor guidance in practice. This leads to the search for policy that performs well for a broad class of economies. This is what robust control theory is all about. In this book, Hansen and Sargent greatly extend robust control theory to make it useful in the macro policy setting. This is a major contribution to macroeconomics."—Edward C. Prescott, Nobel Prize-winning economist

"The pathbreaking work of Hansen and Sargent extends macroeconomic theory beyond the Bayesian paradigm. They retain the analytical power of the classical mathematical models while adding to them the subtleties of an uncertain world. Using tools from robust control theory, they present a model in which an individual's probabilistic belief is subject to noise, or to uncertainty, and redo much of macroeconomic theory under this assumption."—Itzhak Gilboa, Tel Aviv University

"Hansen and Sargent were among the cadre of macroeconomists who challenged conventional (Keynesian) wisdom, and they are at it again, in a book that sparkles with ideas and analysis of fundamental problems in dynamic macroeconomics. The specific results reported here are, of course, interesting but this book is so much more: for young and ambitious economic theorists, this book is like the California gold fields in 1848."—David Kreps, Stanford University

Editorial Reviews

Lars Peter Hansen, Co-Winner of the 2013 Nobel Prize in Economics

Thomas J. Sargent, Winner of the 2011 Nobel Prize in Economics

"The book is self-contained and rigorous and may be interesting not only for macroeconomists who seek to improve the robustness of decision making process but also for control engineers interested in different applications of their professional abilities."—-A. Swierniak, Zentralblatt MATH

From the Publisher

The book is self-contained and rigorous and may be interesting not only for macroeconomists who seek to improve the robustness of decision making process but also for control engineers interested in different applications of their professional abilities.

Zentralblatt MATH - A. Swierniak

The book is self-contained and rigorous and may be interesting not only for macroeconomists who seek to improve the robustness of decision making process but also for control engineers interested in different applications of their professional abilities.
— A. Swierniak

Zentralblatt MATH Database

The book is self-contained and rigorous and may be interesting not only for macroeconomists who seek to improve the robustness of decision making process but also for control engineers interested in different applications of their professional abilities.
— A. Swierniak

Zentralblatt MATH