Design Economic Policies that Do Not Create Bumpy Recovery

Abstract

This chapter studies how to make sure when the economic performance indicators approach some pre-determined target values due to the effect of adopted policies, the economy also develops reasonably well without experiencing much severe up-and-down fluctuations. This problem of concern is resolved by addressing the corresponding problem of pole placement of the general control-theory model of the economic system. This chapter (1) discusses conditions under which the poles of a constant coefficient linear economic system can be arbitrarily placed, (2) provides a way to calculate the matrix of feedback gain that is useful in placing the poles by using the feedback control mechanism so that the resultant constant coefficient linear economic system possesses a good quality stability and fast response speed, and (3) investigates the problem of how to design state or output feedbacks (economic policies) so that the resultant closed-loop economic system will have the pre-determined poles. At the end, some open problems of great importance are posed for future research. This chapter relates the issue of economic policy making and the pole placement of the general control-theory model of the economic system. The results are expected to provide practically useful guidelines.