This chapter provides some reflections on the new macroeconomics of model uncertainty. Research on model uncertainty represents a broad effort to understand how the ignorance of individuals and policymakers about the true structure of the economy should and does affect their respective behaviors. As such, this approach challenges certain aspects of modern macroeconomics, most notably the rational expectations assumptions that are generally made in modeling aggregate outcomes. Our goal is to explore some of the most interesting implications of model uncertainty for positive and normative macroeconomic analysis. Our discussion will suggest directions along which work on model uncertainty may be fruitfully developed; as such it is necessarily somewhat speculative as we cannot say to what extent these directions are feasible.

Our interest in model uncertainty is certainly not unique; in fact, within macroeconomics, studies of model uncertainty have become one of the most active areas of research. Much of this new work was stimulated by the seminal contributions of Hansen and Sargent of which (2001, 2003a, b) are only a subset of their contributions. Hansen and Sargent's work explores the question of robustness in decision making. In their approach, agents are not assumed to know the true model of the economy, in contrast to standard rational expectations formulations.