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Four Types of Ignorance

This paper studies alternative ways of representing uncertainty about a law of mo- tion in a version of a classic macroeconomic targetting problem of Milton Friedman (1953). We study both “unstructured uncertainty” – ignorance of the conditional distribution of the target next period as a function of states and controls – and more “structured uncertainty” – ignorance of the probability distribution of a response co- efficient in an otherwise fully trusted specification of the conditional distribution of next period’s target. We study whether and how different uncertainties affect Fried- man’s advice to be cautious in using a quantitative model to fine tune macroeconomic outcomes.

Authors: 
Lars Peter Hansen, University of Chicago
Thomas J. Sargent, New York University
Publication Date: 
January, 2015
Publication Status: