Economic policy when models disagree

Working Paper 4

Abstract

We propose a general way to craft public policy when there is no consensual account of the situation of interest.

The design builds on an extension and dual representation of the traditional theory of economic policy. It does not require a representative policy-maker’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 the Bayesian model-averaging approach).

The obtained policies are shown to be robust and simple in a precise and intuitive sense.

Pauline Barrieu and Bernard Sinclair Desgagné