The implications of risk sensitive decision making for macroeconomic planning in The Netherlands

Abstract

Policy optimisation under certainty equivalence is an attractive method of decision making in complex dynamic systems, but it does not take into account the uncertainty about macroeconomic projections. By relaxing the assumption that only expectations matter, this article develops risk sensitive decisions. They are applied to the information given by the last medium term plan of the Central Planning Bureau. Inspection of past forecasting errors could have told the planners that unemployment would be more persistent than inflation or the current account deficit. Risk sensitive policies imply smaller wage cuts and, if policy makers are concerned with the growth of real disposable income, other instruments are also used less vigorously.