Abstract
Abstract This paper attempts to incorporate expectation generating mechanisms in a formal economic planning model. We have tried to introduce a simple bayesian filter method into an econometric model to see how the system parameters would change subject to a ‘policy-optimization-process’. The method was applied to a monetary policy model for India to see how the political authorities would react to private sector reactions to the policy-optimization-process. Through continuous updating of the response parameters, we can derive a very different type of monetary-fiscal policy structure than that which can be obtained through the usual optimal control process.
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