An application of the linear quadratic tracking problem to economic stabilization policy

Short-term economic stabilization policy is approached as a problem in optimal control. The optimal control problem is defined as a dual discrete-time tracking problem (nominal state and nominal policy trajectories are tracked) for a linear time-invariant system with a quadratic cost functional. This problem is solved analytically, and the solution is applied to a 28-state variable quarterly econometric model. The experimental results demonstrate that this approach is valuable both as a tool for policy planning and as a method of analyzing the dynamic properties of econometric models.