Policy evaluation and robustness

The Greek word “hybris” best characterizes the belief that social scientists could come up with the ultimate model of the economy that accounts for all key drivers of economic crises and use it to design the ideal macroeconomic and financial policy mix. Instead, incomplete knowledge and uncertainty about the structure of the economy, that is what economists call model uncertainty, will remain a central feature of the policy problem. Thus, the Macroeconomic Model Database, which contains many competing policy-focused macroeconomic models and is being further expanded under WP8 provides a useful platform for addressing the call by former ECB President Trichet for improving the robustness of the policy framework (see Trichet, 2010). This work package makes progress towards formalizing and implementing a systematic approach for developing policy prescriptions that are robust to model uncertainty. It takes advantage of new macroeconomic models with better representations of financial sector institutions and market participants behaviours in response to financial risks developed under WP5, WP6 and WP7. Furthermore, it incorporates some of the new policy evaluation tools developed under WP9 and WP10 in the quest for robust policy design.