Optimal exchange rate management via Pontryagin´s principle in the Italian economy

The use of continuous time models in policy design has several advantages (see Gandolfo, 1981), amongst which there is the possibility of obtaining information on the optimal paths of instruments and targets at each point in time (and not only at discrete intervals). Econometric models are usually specified in discrete time, but recently developed econometric methods (Bergstrom ed., 1976; Bergstrom, 1983, 1984; Gandolfo, 1981; Wymer, 1972, 1976) allow to obtain rigorous estimates of the parameters of econometric models specified as stochastic differential equation systems. In this paper we examine a problem of optimal control in the context of a continuous time macroeconometric model of the Italian economy due to Gandolfo and Padoan (1984). For a more general treatment see Gandolfo and Petit (1986b).