Abstract
In this paper I shall outline some of the unresolved issues in the application of optimisation techniques in the choice of monetary and fiscal policies for an open economy. Many of these issues are independent of the methods used to choose policies, but most have implications for the use of optimal control techniques. Nevertheless, there is a sense in which the great efficiency of policy selection by optimisation techniques forces many of the issues into the open. Why is this? It is because any powerful optimisation technique pushes hard at all the constraints of the system, and tests all conceivable combinations of instruments. If there is a falsely loose constraint in the system, then the optimal controls will take full advantage of it. If one group of decisionmakers in the model is falsely depicted as having static expectations, then the optimally-chosen policies will unmercifully exploit their gullibility. Pindyck (1973, pp. 151–3) has emphasised that this exploitive power of optimisation techniques makes them very useful in exposing ‘… characteristics of the model that would otherwise remain submerged’. Until this process is over, and there is no clear way of telling when it is over, the optimal control techniques must be regarded primarily as part of the model-building process rather than as an established procedure for policy selection.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Bray, Jeremy (1975), ‘Optimal Control of a Noisy Economy with the U.K. as an Example’, J. R. Statist. Soc., A, part 3, 138, pp. 339–66.
Dornbusch, Rudiger (1976), ‘The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy’, Scandin. J. Econ., no. 2, 78, pp. 255–75.
Edgren, Gösta, K. O. Faxen and C. E. Odhner (1969), ‘Wages, Growth, and the Distribution of Income’, Swed. J. Econ., no. 3, 71, pp. 133–60.
Frenkel, Jacob A. (1976), ‘A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence’, Scandin. J. Econ., no. 2, 78, pp. 200–24.
Helliwell, John F. (1974), ‘Trade, Capital Flows, and Migration as Channels for International Transmission of Stabilization Policies’, in A. Ando, R. Herring, and R. Marston, eds, International Aspects of Stabilization Policies (Federal Reserve Bank of Boston, Boston, 1974) pp. 241–78.
Helliwell, John F. (1975), ‘Adjustment Under Fixed and Flexible Exchange Rates’, in P. B. Kenen, ed. International Trade and Finance: Frontiers for Research (Cambridge U.P., London) pp. 379–410.
Helliwell, John, and Tom Maxwell (1974), ‘Monetary Interdependence of Canada and the United States under Alternative Exchange Rate Systems’, in R. Z. Aliber, ed. National Monetary Policies and the International Financial System (University of Chicago Press) pp. 82–108.
Helliwell, John F., and John M. Lester (1976), ‘External Linkages of the Canadian Monetary System’, Can. J. Econ., Nov 1976, 9, pp. 648–69.
Holbrook, Robert S. (1973), An Approach to the Choice of Optimal Policy using Large Econometric Models (Bank of Canada, Ottawa: Staff Research Studies, no. 8).
Johnson, Harry G. (1973), ‘The Monetary Approach to Balance-of-Payments Theory’, in M. B. Connolly and A. K. Swoboda, eds, International Trade and Money: The Geneva Essays (Allen & Unwin, London) pp. 206–24.
Jonson, P. D., and H. Kierzkowski (1975), ‘The Balance of Payments: An Analytic Exercise’, Manch. Sch., June 1975, pp. 105–34.
Kenen, Peter B. (1976), Capital Mobility and Financial Integration: A Survey (International Finance Section, Princeton Univ.: Princeton Studies in International Finance no. 39).
Kouri, Pentti J. K. (1976), ‘The Exchange Rate in the Short Run and in the Long Run: A Monetary Approach’, Scandin. J. Econ., no. 2, 78, pp. 280–304.
Kouri, P. J. K., and M. G. Porter (1974), ‘International Capital Flows and Portfolio Equilibrium’, J. Polit. Econ., May/June, 82, pp. 443–68.
Laidler, David (1976), ‘Inflation in Britain: A Monetarist Perspective’, Amer. Econ. Rev., Sep, 66, pp. 485–500.
McKinnon, Ronald I. (1975), ‘The Limited Role of Fiscal Policy in an Open Economy’, paper prepared for a conference on the Monetary Mechanism in Open Economies sponsored by the Bank of Finland, Helsinki, Aug 1975.
Meade, James E. (1951), Balance of Payments (Oxford University Press, London).
Miller, Marcus H. (1976), ‘Can a Rise in Import Prices be Inflationary and Deflationary? Economists and the U.K. Inflation, 1973–74’, Amer. Econ. Rev., Sep, 66, pp. 501–19.
Mundell, Robert A. (1968), International Economics (Macmillan and Collier-Macmillan, New York and London).
Mussa, Michael (1976), ‘The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy Under a Regime of Controlled Floating’, Scandin. J. Econ., no. 2, 78, pp. 229–48.
Parkin, J. Michael (1977), ‘World Inflation, International Relative Prices, and Monetary Equilibrium under Fixed Exchange Rates’, in R. Z. Aliber, ed, The Political Economy of Monetary Reform (Macmillan, London).
Paunio, J. J., and H. Halttunen (1976), ‘The “Nordic” Approach to Inflation: Interpretation and Comments’, in J. M. Parkin and M. Zis, eds, Inflation in the World Economy (Manchester Univ. Press) pp. 259–70.
Pindyck, Robert S. (1973), Optimal Planning for Economic Stabilization (North-Holland, Amsterdam).
Salter, W. E. G. (1959), ‘Internal and External Balance: The Role of Price and Expenditure Effects’, Econ. Rec., Aug, 35, pp. 226–38.
Sargent, Thomas J. (1976), ‘A Classical Macroeconometric Model for the United States’, J. Polit. Econ., Apr, 84, pp. 207–38.
Shiller, Robert J. (1975), ‘Rational Expectations and the Dynamic Structure of Macroeconomic Models’, paper prepared for a conference on the Monetary Mechanism in Open Economies, sponsored by the Bank of Finland, Helsinki, Aug 1975.
Shupp, Frankin R. (1976), ‘Optimal Policy Rules for a Temporary Incomes Policy’, Rev. Econ. Stud., June, 43, pp. 249–60.
Tsiang, S. C. (1975), ‘The Dynamics of International Capital Flows and Internal and External Balance’, Quart. J. Econ., May, 89, pp. 195–214.
Walters, A. A. (1971), ‘Consistent Expectations, Distributed Lags and the Quantity Theory’, Econ. J., June, pp. 273–81.
Westcott, J. H., S. Holly, B. Rüstem, and M. B. Zarrop, ‘Control Theory in the Formulation of Economic Policy’ (Imperial College, London, PREM Discussion Paper no. 17: Submission to the Committee of Inquiry on Policy Optimisation).
Editor information
Editors and Affiliations
Copyright information
© 1979 John F. Helliwell
About this chapter
Cite this chapter
Helliwell, J.F. (1979). Recent Developments in Policy Optimisation for an Open Monetary Economy. In: Holly, S., Rüstem, B., Zarrop, M.B. (eds) Optimal Control for Econometric Models. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-16092-1_3
Download citation
DOI: https://doi.org/10.1007/978-1-349-16092-1_3
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-16094-5
Online ISBN: 978-1-349-16092-1
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)