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Working Paper
Doubts about the Model and Optimal Policy
This paper analyzes optimal policy in setups where both the leader and the follower have doubts about the probability model of uncertainty. I illustrate the methodology in two environments: a) an industry populated with a large firm and many small firms in a competitive fringe, where both types of firms doubt the probability model of demand shocks, and b) a general equilibrium economy, where a policymaker taxes linearly the labor income of a representative household in order to finance an exogenous stream of stochastic spending shocks. The policymaker can distrust the probability model of ...
Working Paper
Averaging Impulse Responses Using Prediction Pools
Macroeconomists construct impulse responses using many competing time series models and different statistical paradigms (Bayesian or frequentist). We adapt optimal linear prediction pools to efficiently combine impulse response estimators for the effects of the same economic shock from this vast class of possible models. We thus alleviate the need to choose one specific model, obtaining weights that are typically positive for more than one model. Three Monte Carlo simulations and two monetary shock empirical applications illustrate how the weights leverage the strengths of each model by (i) ...
Discussion Paper
Model Uncertainty and Policy Design
This article illustrates the main challenges and forces that emerge in optimal policy design when there are doubts about the probability model of uncertainty. Model doubts can stem from either the side of the public or the side of the policymaker, and they can give rise to cautious probabilistic assessments. A basic idea that surfaces in setups with model uncertainty is the management of the public's pessimistic expectations by the policymaker. The article also presents several implications of this idea.