Acknowledging misspecification in macroeconomic theory

We explore methods for confronting model misspecification in macroeconomics . We construct dynamic equilibria in which private agents and policy makers recognize that models are approximations. We explore two generalizations o f rational expectations equilibria. In one of these equilibria, decision-ma kers use dynamic evolution equations that are imperfect statistical approxi mations, and in the other misspecification is impossible to detect even fro m infinite samples of time series data. In the first of these equilibria, d ecision rules are tailored to be robust to the allowable statistical discre pancies. Using frequency domain methods, we show that robust decision-maker s treat model misspecification like time series econometricians. (C) 2001 A cademic Press.