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Economic Policy when Models Disagree

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  • Pauline Barrieu
  • Bernard Sinclair-Desgagné

Abstract

This paper proposes a general way to conceive public policy when there is no consensual account of the situation of interest. The approach builds on an extension and dual formulation of the traditional theory of economic policy. It does not need a representative policymaker’s utility function (as in the literature on ambiguity), a reference model (as in robust control theory) or some prior probability distribution over the set of supplied scenarios (as in Bayesian model-averaging). The method requires instead that the willingness to accept a policy’s projected outcomes coincide with the willingness to pay to correct the current situation. Policies constructed in this manner are shown to be e ective, robust and simple in a precise and intuitive sense.
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Suggested Citation

  • Pauline Barrieu & Bernard Sinclair-Desgagné, 2009. "Economic Policy when Models Disagree," CIRANO Working Papers 2009s-03, CIRANO.
    • Handle: RePEc:cir:cirwor:2009s-03
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    File URL: https://cirano.qc.ca/files/publications/2009s-03.pdf
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    More about this item

    Keywords

    Model uncertainty; Theory of economic policy; Ambiguity; Robustness; Incertitude sur les modèles; théorie de la politique économique; ambigüité; robustesse;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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