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Authors: Jaroslav Borovička, Lars Peter Hansen and Thomas J. Sargent

Date: January 2023
Macroeconomists use first and second-order approximations as pedagogical devices and as solution methods for dynamic stochastic models. We modify these methods so that uncertainty has an enhanced impact on the approximation. This approach gives a novel way to represent implications of a commonly-used recursive utility specification and demonstrates a close ties to robust control methods. The uncertainty enhancement is reflected in a revealing change of probability measure pertinent for interpretation and computation.

“Exploring Recursive Utility” with Jaroslav Borovička and Thomas Sargent