Control Theory and Economic Stabilization: a Comment on the Kalciibrenner and Tinsley and Prescott Papers

One of the more important questions in the area of quantitative economic policy concerns the suitability of optimal control theory for economic stabilization problems. Despite extensive theoretical and applied research in this area, the question of the appropriateness of control theory has still not been completely resolved. The papers by Kalchbrenner and Tinsley and by Prescott are, therefore, most welcome for they clarify, in quite different ways, some of the critical issues bearing on this question. Prescott draws on the extensive theoretical research of the past decade, and Kalchbrenner and Tinsley proceed from their operational experience at the Federal Reserve Board. The conclusion 1 would draw from these papers is that optimal control can indeed be very useful for stabilization problems, provided that expectations and all auxiliary information are adequately treated. The problems which arise in attempting to satisfy this proviso are, however, nontrivial. I will confine my comments to the issues that have particular relevance to this conclusion.