Abstract
This paper utilizes the baseline Real Business Cycle (RBC) model in order to construct a time recursive approximate optimal decision rule as a linear function of the model's state variables and an exogenous surprise shock that hits the economy. The constructed rule is subsequently used in order to examine and compare the dynamics of the capital stock and random total factor productivity (TFP). For this purpose, an open-loop control system is analyzed and compared with the closed-loop control system which results from the application of the time recursive approximate optimal decision rule. A set of optimal control indicators is proposed in order to evaluate the effects resulting from the application of this rule on the behavior of the open-loop control system. The results obtained show a significant reduction in the volatility of the capital stock when the constructed approximate optimal decision rule is applied to the open-loop control system.
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