The Role of Feedback in Macroeconomic Policy

Whilst economists have been exploring the application of optimal control theory to macroeconomic policy formulation some engineers have been re-examining classical feedback theory. Recently the feedback literature has been extended to cover multivariable systems in a way which gives insight into questions of stability and control. In this paper some of the features of this feedback approach most relevant to economic applications are demonstrated using two different macroeconomic models. We begin with a version of Bill Phillips’ model which he used in his famous article (Phillips (1954)), to illustrate the application of control theory to economies. Then we turn to Wassily Leontief’s dynamic input-output model which is a large linear model used for planning purposes in many countries. Finally we examine how the feedback techniques could be used to analyse a nonlinear model.