Classical Linear-Control Analysis Applied to Business-Cycle Dynamics and Stability

Abstract

Linear-control analysis, Dynamic macroeconomic systems, Business-cycle dynamics, Stabilization policies,

Manual-Control Analysis Applied to the Money Supply Control Task

“…The parameters used to characterize the self-regulating dynamics are the natural frequency ω n and damping ratio ζ , and a gain K. Representative values for these parameters, based on the period 1950-1981, are ω n = 1.5 rad/yr, ζ = 0.8, and K = 2 yr. These numerical values were determined through parameter identification methods described in Wingrove (1983).…”

“…Nonmonetary effects during this time period include the 1964/65 tax cut, the 1968/69 tax surcharge, and the 1973/74 oil shock. Nonmonetary effects of this type and their interactions with the economic dynamics are discussed further in Wingrove (1983).…”

“…the growth in money supply has moved in conjunction with business activity. The study in Wingrove (1983) analyzes how these procyclical movements in the money supply reduce the damping of the overall (closed-loop) system dynamics. Such lightly damped dynamics when subjected to random disturbances tend to produce business cycles.…”

“…Also, one can add dynamic elements (e.g., filtering/prediction) and additional feedback variables such as the growth in prices, interest rates, the unemployment rate as in Wingrove (1983), or the growth in nominal GNP as in Gordon (1983). These types of extensions appear to be promising as a means to build upon and compare different concepts about stabilization policies, and to study relationships among a broader class of dynamic variables.…”

“…Following the theoretical framework of Milton Friedman (1971), a model for these economic dynamics was developed by Dean Taylor in (1976). This model was used by the author Wingrove (1983) to study how output fluctuations, termed "business cycles," have been influenced by the historical movements in the money supply. This paper uses the model further to study how the nature of output fluctuations can be influenced by the recent change in the procedure used by the Federal Reserve Board to control the money supply.…”