In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt...

In this paper we examine the effects of two types of “induced uncertainty”, model uncertainty due to robustness (RB) and state uncertainty due to finite information–processing capacity (called rational inattention or RI), on consumption and the current account. We show that the combination...

In this paper we examine the effects of model misspecification (robustness or RB) on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation. We show that in the presence of capital mobility in financial markets, RB lowers the...