The determinants of economic policy with rational expectations

This paper is a summary of remarks for a panel discussion on "Rational Expectations and the Control of the Economy". After a brief review of the major issues in this area, it is argued that the central problem is not that optimization techniques are inadequate for macroeconomic policy, but rather that policymakers, in practice, may use these techniques inappropriately. Whether optimal control can be useful for stabilizing the economy, therefore, depends on the government policy making process and the incentive structure under which policy decisions are made. It is suggested that a potential resolution to the problem can come from a normative examination of the behavior of governmental policy making agencies.