Controllability of economic systems under alternative expectations hypotheses—The discrete case

AbstractIn this paper, the system-theoretic concept of controllability is applied to macroeconomic decision models. There are several forms of controllability which are of great relevance for the theory of economic policy, especially the concept of target path controllability (TPC). TPC means that a given set of instrument (control) variables are capable of steering a given set of target variables exactly along arbitrarily selected time paths. The authors analyse whether TPC can hold in Keynesian-type models with an expectations-augmented Phillips curve for the labour market. They demonstrate that, in the long-run version of the model (where capacity effects are taken into consideration), TPC is possible—even under rational inflationary expectations. Without capacity effects, i.e. in the short-run case, TPC (in the global sense) neither holds under rational nor under adaptive expectations. In the short-run model only local path controllability (like target point controllability) can hold. This shows that a long-term orientated economic policy may be more effective than a short-term policy. The authors discuss also the concept of “natural output” in the framework of “capacity” models with sluggish wage adjustment. They demonstrate that there is no point in defining “natural output” as in McCallum's and Barro's long-run models