Optimal control of nonlinear dynamic econometric models: An algorithm and an application

OPTCON is an algorithm for the optimal control of nonlinear stochastic systems which is particularly applicable to econometric models. It delivers approximate numerical solutions to optimum control problems with a quadratic objective function for nonlinear econometric models with additive and multiplicative (parameter) uncertainties. The algorithm was programmed in C# and allows for deterministic and stochastic control, the latter with open-loop and passive learning (open-loop feedback) information patterns. The applicability of the algorithm is demonstrated by experiments ∗Corresponding author: Prof. Reinhard Neck, Department of Economics, Klagenfurt University, Universitätsstrasse 65-67, A-9020 Klagenfurt, Austria/Europe, Ph: +43 463 2700 4121, Fax: +43 463 2700 994121, Email: [email protected] with a small quarterly macroeconometric model for Slovenia. This illustrates the convergence and the practical usefulness of the algorithm and (in most cases) the superiority of open-loop feedback over open-loop controls. KeywordsOptimal control; Stochastic control; Algorithms; Econometric modeling; Policy applications