This paper describes links between the max-min expected utility theory of Gilboa and Schmeidler (1989) and the applications of robust control theory proposed by Anderson, Hansen and Sargent (2000) and Dupuis, James and Petersen (1998).

This paper describes an environment in which government-issued currency is dominated in rate of return and in which there obtains a Modigliani-Miller theorem for government open market operations. Earlier Modigliani-Miller theorems for government finance have been stated for environments in which government-issued currency is not dominated in rate of return in equilibrium. Since government-issued currency is widely observed to be dominated in return, it is useful to study how Modigliani-Miller theorems hinge on absence of rate of return dominance.

This paper describes aspects of the French Revolution from the perspective of theories about money and government budget constraints. We describe how unpleasant fiscal arithmetic gripped the Old Regime, how the Estates General responded to reorganize France's fiscal affairs, and how fiscal exigencies impelled the Revolution into a procession of monetary experiments ending in hyper-inflation.

A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets. We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. The asymptotic mean of the planner's portfolio minimizes a measure of fiscal risk. We obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, the invariant distribution of debt is very dispersed, and mean reversion is slow.

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small‐noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.

. We develop models of robust decision-making and pricing when there are contemporaneous big and small shocks. We illustrate these models using a stochasticgrowth economy. Large shocks are infrequent changes in the technological growth rate, and small shocks are continuous movements in the technology process. Large shocks evolve as a Markov jump process whereas small shocks are a Brownian motion. Robust decision-making is formalized as a two-player game. In contrast to rational expectations agents, our investors are decision-makers who treat models as approximations and fear misspecication. As an algorithmic device to enforce robustness, investors imagine a second, malevolent player, who has the ability to perturb the baseline model. We study two economies, each of which decentralizes a robust resource allocation problem with hidden growth rates. The economies dier in the manner in which the the model is viewed as an approximation. We compare the pricing implications to those that em...

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority's approximating nonexpectational Phillips curve.A dynamic programming problem implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves.Our estimates attribute the rise and fall of post WWII inflation in the US to an intricate interaction between the monetary authority's beliefs and economic shocks.Shocks in the 1970s altered the monetary authority's estimates and made it misperceive the tradeoff between inflation and unemployment.That caused a sharp rise in inflation in the 1970s.Our estimates say that policymakers updated their beliefs continuously.By the 1980s,

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate the parameters of a “true” data-generating mechanism and those of a sequence of approximating models that a monetary authority uses to guide its decisions. Gaps between a true expectational Phillips curve and the monetary authority's approximating nonexpectational Phillips curve models unleash inflation that a monetary authority that knows the true model would avoid. A sequence of dynamic programming problems implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves. Our estimates attribute the rise and fall of post-WWII inflation in the United States to an intricate interaction between the monetary authority's beliefs and economic shocks. Shocks in the 1970s made the monetary authority perceive a tradeoff between inflation and unemployment which ignited big inflation. The monetary authority's beliefs about the Phillips curve changed in ways that account for former Federal Reserve Chairman Paul Volcker's conquest of U.S. inflation.

We infer determinants of Latin American hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden Markov model that potentially assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals. Our maximum likelihood estimates allow us to interpret observed inflation rates in terms of variations in the deficits, sequences of shocks that trigger temporary episodes of expectations driven hyperinflations, and occasional superficial reforms that cut inflation without reforming deficits. Our estimates also allow us to infer the deficit adjustments that seem to have permanently stabilized inflation processes.

In an economy studied by Lucas and Stokey, tax rates inherit the serial correlation structure of government expenditures, belying Barro's earlier result that taxes should be a random walk for any stochastic process of government expenditures. To recover a version of Barro's random walk tax-smoothing outcome, we modify Lucas and Stokey's economy to permit only risk-free debt. Having only risk-free debt confronts the Ramsey planner with additional constraints on equilibrium allocations beyond one imposed by Lucas and Stokey's assumption of complete markets. The Ramsey outcome blends features of Barro's model with Lucas and Stokey's. In our model, the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in Lucas and Stokey's model, but incomplete markets put a nearunit root component into government debt and taxes, an outcome like Barro's. However, we show that without ad hoc limits on the government's asset holdings, outcomes can diverge in important ways from Barro's. Our results use and extend recent advances in the consumption-smoothing literature.