The Quality of Quantitative Economic Policy-making when Targets and Costs of Change are Mis-specified

Abstract

In a series of well-known works [3], [4], [5], [6], Tinbergen has made pioneering and outstanding contributions to the theory and application of quantitative economic policy-making (Q.E.P.).Tinbergen’s approach to Q.E.P. involves the following elements: (a) a criterion or welfare function that depends on certain economic variables, (b) a classification of variables into categories, target and non-target endogenous variables and instrumental and non-instrumental exogenous variables, (c) an econometric model involving relationships for variables and (d) boundary conditions for selected variables. Within this framework, which resembles closely the framework of modern control theory, Tinbergen provided simple, operational procedures for solving for values of policy instrument variables at a time when modern control theory was in its infancy.

Research financed in part by the National Science Foundation under grant GS-2347 and by income from the H. G. B. Alexander Fund, Graduate School of Business, University of Chicago. This paper was written when the author was Visiting Ford Research Professor in the Department of Economics, University of California at Berkeley. Some of the material in this paper was presented to the Econometrics Seminar, Stanford University. Several comments of T. W. Anderson were particularly helpful.