Filtering and Control of Macroeconomic Systems: A Control System Incorporating the Kaiman Filter for the Indian Economy

Advances in computer technology, coupled with the sophistication of econometric modelling, have enabled rapid progress in the formulation and solution of optimal control and filtering programmes, especially in the sphere of macroeconomic policy designing. These developments in systems methodology have prompted the need for an interface between optimal control theory and dynamic macroeconomic analysis. The implications of this convergence have already aroused a great deal of research, but it remains to be seen whether policy makers in most developing countries will consider actually incorporating these techniques into planning. The author argues that control and systems theory can be of immense help in stabilizing those economies plagued by cyclical and structural problems. By demonstrating the applicability of control & filter theory to short-term macroeconomic planning, this book illuminates the impressive array of problems that can thereby be solved, and helps foster a closer working relationship between economists and control theorists. The work deals specifically with the construction of a Kalman filter mechanism, for deriving short-term optimal economic policies under conditions of uncertainty. It specifies and resolves a macroeconometric model which is linked to a unique observation sub-system of a given economy, congruent with the errors in information signalling which are prevalent within the data base context of most developing countries. An evaluation of control settings contrasts short and long-term economic policies. This indicates that an economy may `overheat' under protracted settings of instrument values around their optimal levels if the constraints on the system, in the form of external shocks, are too great to allow reaching all targets simultaneously using feasible instrument paths. Content: Contributions to Economic Analysis Page ii Front Matter Page iii Copyright page Page iv Introduction to the series Page v Dedication Page vii Preface Pages ix-x M.J. Manohar Rao Chapter 1 - Introduction Pages 1-7 Chapter 2 - Filtering and Control of Stochastic Systems Pages 9-23 Chapter 3 - An Annual Nonlinear Model of the Indian Economy Pages 25-69 Chapter 4 - Structural Analysis of the Model Pages 71-129 Chapter 5 - Resolution and State Space Representation of the Model Pages 131-147 Chapter 6 - Optimal Filtering and State Reconstruction Pages 149-176 Chapter 7 - Optimal Control and Macroeconomic Planning: the Indian Context Pages 177-212 Chapter 8 - Conclusions Pages 213-228 Appendix A - The Optimum Linear Discrete Filter Pages 229-238 Appendix B - The Discrete Maximum Principle Pages 239-244 Appendix C - Controllability and Observability Pages 245-254 Annexure - Data Used in the Estimation Process Pages 255-260 References Pages 261-271 Author Index Pages 273-275 Subject Index Pages 277-279