Optimal Control, Expectations and Uncertainty

An examination of how the rational expectations revolution and game theory have enhanced the understanding of how an economy functions.

Sean Holly (Author), Andrew Hughes Hallet (Author)

9780521264440, Cambridge University Press

Hardback, published 20 July 1989

260 pages
23.7 x 16 x 2 cm, 0.511 kg

"...a nicely written book that covers a wealth of optimization tools originating from optimal and stochastic control and game theory, in a context of policy making in economics....a good introduction to the topic for those who would want to pursue research in dynamic decision making under uncertainty." Tamer Ba^D,sar, Mathematical Reviews

The rational expectations revolution and other developments in economics (notably game theory) have fundamentally altered the application of optimal control theory to economic forecasting and planning. In particular, they have shown that economic systems cannot be modelled simplistically on physical systems. However, as the authors of this volume show, these developments have greatly enhanced our understanding of how an economy functions, and now make it possible for optimal control theory to be applied much more effectively to economic modelling and planning. This book is divided into two parts. The first presents the orthodox framework but extends it to allow for multiplicative uncertainty, risk and non-linearities in the econometric model. The second part looks explicitly at the question of expectations. It provides methods by which forward-looking expectations can be treated jointly with the determination of economic policy. It also examines game-theoretic considerations - where, for instance, policy makers may have incentive to renege on their commitments.

Preface
1. Introduction
2. The theory of economic policy and the linear model
3. Optimal-policy design
4. Uncertainty and risk
5. Risk aversion, priorities and achievements
6. Non-linear optimal control
7. The linear rational-expectations model
8. Policy design for rational-expectations models
9. Non-cooperative, full-information dynamic games
10. Incomplete information, bargaining and social optima
Notes
References
Index.

Subject Areas: Macroeconomics [KCB]