This book provides a unified analysis of the theory of economic policy, presenting static and dynamic aspects of both the fixed and flexible objective policy problems. The authors conceive of the abstract theory of economic policy as the interaction of policy possibilities with policy-making requirements. Policy possibilities are depicted by a known, linear model relating sets of targets, instruments and other variables. Policy-making requirements are imposed in two forms: directly by nominating a specific fixed target in the tradition of Tinbergen; and indirectly by specifying preferences about targets - the flexible target associated with Theil.
Part I. The static theory of policy: 1. A review of the static theory of policy; 2. The algebraic structure of fixed objective problems; 3. The algebraic structure of flexible objective problems; 4. The dynamic policy problem: models and objectives; 5. Controllability properties of dynamic policy models; 6. Observability properties of dynamic policy models; 7. The dynamic theory of stationarity objectives; 8. The dynamic theory of path objectives; 9. Policy design for path objectives; 10. Rational expectations and the theory of policy; Part III. Dynamic flexible objectives: on tracking points and paths: 11. Dynamic finite horizon flexible objective problems; 12. Policy existence and uniqueness for infinite horizon flexible objective problems; 13. Some stability issues in dynamic policy problems; 14. Aftersight.