BPEA | 2003 No. 1

Policy Evaluation in Uncertain Economic Environments

2003, No. 1

This paper describes some approaches to macroeconomic policy evaluation
in the presence of uncertainty about the structure of the economic
environment under study. The perspective we discuss is designed to facilitate
policy evaluation for several forms of uncertainty. For example, our
approach may be used when an analyst is unsure about the appropriate
economic theory that should be assumed to apply, or about the particular
functional forms that translate a general theory into a form amenable to
statistical analysis. As such, the methods we describe are, we believe, particularly
useful in a range of macroeconomic contexts where fundamental
disagreements exist as to the determinants of the problem under study. In
addition, this approach recognizes that even if economists agree on the underlying economic theory that describes a phenomenon, policy evaluation
often requires taking a stance on details of the economic environment,
such as lag lengths and functional form, that the theory does not
specify. Hence our analysis is motivated by concerns similar to those that
led to the development of model calibration methods. Unlike in the usual
calibration approach, however, we do not reject formal statistical inference
methods but rather incorporate model uncertainty into them.