Robustness of Policy Analysis to Departures from Model-Consistent Expectations

Institute for New Economic Thinking, INET 259
Principal Investigator: Michael Woodford


This project proposes an approach to policy analysis in the context of a macroeconomic model founded on individual optimization that does not, as is conventional, assume that people in the economy must forecast future the economy’s future evolution under any given policy in the same way as the policy analyst’s own model does. This should allow, in particular, for consideration of the desirable response of monetary policy to asset price “bubbles” inconsistent with “rational expectations”. The approach dispenses with the idea that expectations can be uniquely predicted, and instead requires policy to be robust to any expectations within certain bounds.