ABSTRACT
We obtained a growth model in the previous chapter, which is combined in the present chapter with the stabilisation model of chapter 6. So this chapter is concerned with the design and analysis of policy feedbacks by using optimal control theory. Macroeconometric models are invariably used for simulation, forecast or control purposes.1 Since simulation does not provide a direct means of obtaining a policy that is optimal with respect to a given objective, in the last few decades control theory has proved to be a very efficient tool to study the dynamic economic systems for policy purposes. The essential idea of optimal control is precisely to derive the optimal policy
in order to steer the economy to the specified targets. The economic applications of optimal control theory in macroeconomic policy research have a long history and are well discussed in Pindyck (1973), Chow (1975), Holly et. al. (1979), Kendrick (1981), and Turner et. al. (1989). Rao and Singh (1997) derive macroeconomic stabilisation policies for the Indian economy applying control methods within a financial programming approach of the IMF.
