On the Use of Feedback Control in the Design of Aggregate Monetary Policy
Abstract
Periodic feedback revision in policy plans to incorporate recent measurements of economic activity is perhaps the minimal strategy response to uncertainty. This paper illustrates an evolution of feedback revisions in monetary policy by an optimal control exercise with the MIT-PENNSSRC (MPS) quarterly model over the turbulent eight-quarter interval beginning in mid-1973. The purpose of the exercise is to trace the impact of measured historical dislocations of the economy on the ex ante expectations of a feedback strategy, and contrast the result with two alternative strategies: an open-loop strategy without feedbacking, and the optimal prescience strategy based on perfect foresight. The design of the feedback exercise is to revise ex ante monetary policy at sixmonth intervals: t= 1973-III, 1974-I, 1974-III, and 1975-I. At the beginning of each recontract quarter, the hypothesized planners select an eight-quarter path for nonborrowed reserves that minimizes the expected loss for the next eight quarters conditioned on their current information set EILt It-1 . Policy loss for this rolling horizon procedure was represented by an eight-quarter sum of asymmetric components
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