Four Types of Ignorance

This paper studies the consequences of alternative ways of representing uncertainty about a law of motion in a version of a classic macroeconomic targetting problem of Milton Friedman (1953). We study both “unstructured uncertainty” – ignorance of the conditional distribution of the target next period as a function of states and controls – and more “structured uncertainty” – ignorance of the probability distribution of a response coefficient in an otherwise fully trusted specification of the conditional distribution of next period’s target. We study whether and how different uncertainties affect Friedman’s advice to be cautious in using a quantitative model to fine tune macroeconomic outcomes.