ABSTRACT
In this chapter, the authors formulate hierarchical control of econometric models and show optimal control solutions for a hierarchical economic system. The structure of the hierarchical system is organized by a coordinator (integrated policymaker) on the upper level, adjusting the interactions among subsystems with decentralized policymakers on the lower level, both of which attempt to minimize the quadratic function on targets and controls subject to linear econometric models. The authors construct single demand-side econometric models for the United States and Japan, and illustrate the hierarchical and decentralized self-tuning controller. Which policy-isolationist, top-down, or bottom-up-can be identified depends on whether the target variables were determined by the integrated policymaker or by decentralized policymakers. For optimal control policy for the hierarchical structure of economies, the authors would say that they are very effective in lessening government expenditures, in particular using top-down policies for the decentralized economies.
