Robustness and Macroeconomic Policy

Posted: 31 Aug 2011

See all articles by Gadi Barlevy

Gadi Barlevy

Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: September 2011

Abstract

This review considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that, when policy makers are uncertain about the environment they face and find it difficult to assign precise probabilities to the alternative scenarios that may characterize this environment, they should design policies to be robust in the sense that they minimize the worst-case loss these policies could ever impose. I review and evaluate the objections cited by critics of this approach. I argue further that, contrary to what some have inferred, concern about worst-case scenarios does not always lead to policies that respond more aggressively to incoming news than the optimal policy would respond absent any uncertainty.

Suggested Citation

Barlevy, Gadi, Robustness and Macroeconomic Policy (September 2011). Annual Review of Economics, Vol. 3, pp. 1-24, 2011, Available at SSRN: https://ssrn.com/abstract=1920099 or http://dx.doi.org/10.1146/annurev-economics-061109-080355

Gadi Barlevy (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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