Controllability under rational expectations

Andrew Hughes Hallett (), Giovanni Di Bartolomeo () and Acocella Nicola

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Abstract: We show that rational expectations do not affect the controllability of an economic system, either in its static or in its dynamic version, even though their introduction in many other circumstances may make it impossible for the policymaker to affect certain variables due to policy invariance, policy neutrality or time inconsistency problems. The controllability conditions stated by Tinbergen and subsequent authors continue to hold under rational expectations; and when they are satisfied rational expectations may even enhance the power to control an economy over time. This is important because it shows that an underlying equilibrium can exist even if our conventional optimisation techniques lead to policy invariance, neutrality or time inconsistency. We provide examples of our results in the context of recent monetary policy debates.

JEL-codes: C61 C62 E52 E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: Written
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