Control theory and input-output analysis †

Abstract

This paper reviews the use of simulation techniques for the testing and analysis of econometric models. Control theory is shown to be a way of obtaining a concise formulation of the properties of the optimal solution rather than the actual solution. Most problems arising from econometric models cannot be solved algebraically and solutions to such problems are obtained using a series of simulation runs. The relationship between Theil's docision rule algorithm and Leontief's dynamic input-output model is demonstrated. In addition, the continuous-time version of the Leontief model is optimized for a quadratic criterion using dynamic programming. Problems relating to the formulation of the social welfare function are discussed and in particular whether the Leentief model provides the appropriate variables needed for the evaluation of social welfare Tho place of control theory within the framework of the Cambridge Growth Model is presented both in relation to past and proposed future work.