Economic Policy Simulation in Dynamic Control Models Under Econometric Estimation

The use of modern control theory in various dynamic economic models has raised a number of interesting issues in the theory of economic policy and its operational applications to problems of economic growth, stabilisation and development planning Two of these seem to be of great importance: econometric estimation viewed as a part of the decision-making process by a policymaker and the operational linkages between a consistency model without any explicit optimisation criterion and an optimisation model with an explicit objective function defined in a programming framework. In order to compare and evaluate alternative economic policies defined within a dynamic econometric model, these two problems become most relevant and they have to be resolved in some manner. As an example of the first type of problem one may refer to the use of the Brookings quarterly econometric model of the U.S. economy by Fromm and Taubman [1] for evaluation of the relative desirability of a set of monetary and fiscal policy actions. They noted that the method of optimum growth defined in a Ramsay-type framework of maximisation of a utility functional over a horizon is not applicable to cyclical paths; moreover it ignores the disutility of the time path of variances of the arguments (e.g. consumption, etc.) in the utility function.