Economic Policy when Models Disagree

Abstract

This paper introduces a general approach to conceive public policy when there is no consensual account of the situation of interest. This approach builds on a basic attribute of rational policymakers - namely their ability to appraise their experts’ scenarios and forecasts - and uses only one normative criterion: that the value to policymakers of a remedy’s projected outcomes meets their willingness to get out of the current situation. Unlike the methods currently put forward in the literature, it does not need (but is compatible with) a representative policymaker’s objective function (as in the ambiguity aversion literature), a reference model (as in robust control theory) or some prior probability distribution over the set of supplied scenarios (as in Bayesian model-averaging). Policies constructed in this manner are shown to be effective, robust, simple and precautionary in a precise and intuitive sense. Keywords: Model uncertainty; General duality; Robustness JEL Classification: D80, E61, C60 ∗Corresponding author: Bernard Sinclair-Desgagné,