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“Optimal control” strikes back?

Summary:
Back in the distant dark days of 2012, the world was still struggling to recover from the financial crisis. America’s job market was only just starting to show the first flickers of growth and leaders in the euro area were still deciding whether or not to blow up the global economy.Throughout that year, Janet Yellen, then the number two at the Federal Reserve Board, began to popularise the use of “optimal control” theory in monetary policy. Here is Yellen’s description from a footnote in a speech she gave in June 2012:First, the FRB/US model’s projections of real activity, inflation, and interest rates are adjusted to replicate the baseline forecast values. Second, a search procedure is used to solve for the path of the federal funds rate that minimizes the value of an assumed loss

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Back in the distant dark days of 2012, the world was still struggling to recover from the...

Matthew C Klein
I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist. I have worked at the world’s largest hedge fund and read every FOMC transcript since May, 1987

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