A decade ago economists began to apply techniques of control theory, as used by engineers, to the formation of economic policy. In Discussion Paper No. 36, Research Fellow David Currie reviews recent developments in the application of control theory to macroeconomic policy design. He emphasizes the crucial difference between the control problem in engineering and in economics. Economic policy, unlike engineering, is concerned with controlling systems composed of intelligent human beings. Currie discusses the problems that this creates for macroeconomic policy formulation and explores the usefulness of the rational expectations assumption in this context.
Currie analyzes the problems of policy formulation in an inter- dependent world. He emphasizes the dangers of a single country choosing its macroeconomic policy while ignoring the effects of its policy on other countries. At an international level, Currie argues, the orderly conduct of macroeconomic policy requires the formulation of appropriate rules, supported by effective incentives or penalty strategies. This is the most immediate issue for both policy-makers and researchers.
Currie concludes by examining the conduct of UK macroeconomic policy over the past five years and argues that greater attention to issues of policy design would have avoided some serious deficiencies in the conduct of this policy.
David Currie discusses these issues at greater length in the first article in this Bulletin.

Macroeconomic Policy Design and Control Theory - A Failed Partnership?
David Currie

Discussion Paper No. 36, December 1984 (IM)