Working Paper 297

The Limits of Counter-Cyclical Monetary Policy: An Analysis Based on Optimal Control Theory and Vector Autoregressions

Robert B. Litterman

Revised February 1, 1986

Optimal control theory can be combined with the probability structure of a vector autoregression to investigate the tradeoffs available to policymakers. Such an approach obtains results based on a minimal set of assumptions about the economy and the structure of policy actions. This paper takes this approach to analyze the potential effectiveness of countercyclical monetary policy.

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