Paper: Dual adaptive control and uncertainty effects in macroeconomic systems optimization

Authors:
Y. Bar-Shalom;K. D. Wall
Affiliations:
University of Connecticut, School of Engineering, Box U-157, Storrs, CT 06268, U.S.A.;University of Virginia, Charlottesville, VA, U.S.A.
Venue:
Automatica (Journal of IFAC)
Year:
1980

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Abstract

A method is presented for the quantitative assessment of the effects of uncertainty in macroeconomic policy optimization problems. Both parameter and measurement uncertainties are considered. The method derives from an application of adaptive dual control theory which decomposes the optimal loss function into three components: deterministic, cautionary, and probing. This characterizes the welfare loss due to uncertainty and permits the study of the relative importance of caution and probing in selecting the optimal policy instruments. An interesting illustration of the method is given for two macroeconometric models derived from the same data, but each with a different level of uncertainty.