Economic modelling and control theory

Timetable

1.5h lecture and 1.5h exercise/laboratory classes per week

Module aim (aims)

The main purpose of the course is to present an interaction of modern macroeconomics theory
and mathematical control theory. Basic notions of macroeconomics and control theory will be
explained from scratch. Thanks to this one can learn a rigorous design scheme and analysis
of monetary and fiscal policies. In the exercise/laboratory classes we will focus on practical
implementation of the theory using real economic data.

Pre-requisites in terms of knowledge, skills and social competences (where relevant)

The required mathematical skills are just a few topics from undergraduate linear algebra and
multivariable calculus, which we will recall in the context of economic and control theory in
the course of the lecture.

Syllabus

Week 1. IS-LM model - Hicks' static Keynesian macroeconomic model
Weak 2. Phillips curve, various notions of unemployment
Weak 3. The role of expectations in economic theory
Weak 4. Policy interest rate, bond yield, there infuence on the financial market
Weak 5. Difference equations, stability, Samuelson's model
Week 6. Description of dynamic macroeconomic models based on the state-space equation
Week 7. Controllability, stability
Week 8. Stabilization via state feedback
Weak 9. Observability, Luenberger observer
Week 10. Model following control, the internal model principle, servomechanism
Weak 11. Lucas critique
Weak 12. Rational vs adaptive expectations hypothesis
Week 13. DSGE (Dynamic Stochastic General Equilibrium) model
Week 14. Design of monetary policy based on the state feedback, Taylor rule
Week 15. The generalized stae-space (descriptor) model, time series analysis

Reading list

1. B. J. Heijdra, Foundations of Modern Macroeconomics (3rd Edition), Oxford University Press, 2017.
2. N. G. Mankiw, Principles of Macroeconomics (6th Edition), South-Western College Pub, 2011.