Macroeconomic policy formulation: A contribution from control theory

The paper describes applications of control theory methods to macroeconomic policy formulation. The use of modelling concepts and techniques arising from control theory are discussed. Applications of control methods to macroeconomic models are described both for linear and for large nonlinear models. In the case of linear models, a minimal state-space representation is obtaine, a quadratic performance index adopted, and, assuming a Gaussian distribution of disturbances, the policy design problem is formulated in terms of a classical optimal control (LQG) framework. For large nonlinear models, and earlier approach involving the control of such systems using small linearised models is discussed initially. Subsequently, a direct approach, using a nonlinear optimisation algorithm, for computing optimal policies is discussd. The derivation of parametrised feedback laws and robust controls in such an optimisation setting is also described.