Targets, instruments and generalized inverses

Clifford S. Russell, V. Kerry Smith

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

The purpose of this paper is to demonstrate the usefulness of generalized inverses for problems associated with macro economic policy. Previous research on the selection of targets and instruments has specified the problem so that both the values of the instruments and the values realized for the targets are a joint outcome of the constrained optimization of an arbitrarily defined welfare function. Two theorems are developed which suggest that: (1) if the number of instruments exceeds the number of targets, a welfare function need not be defined. It is possible to discriminate between policies with a minimum norm generalized inverse which is based on the values of the instruments: (2) given the number of targets exceeds that of instruments the generalized inverse approach reduces to a special case of Theil's certainty equivalence method. Klein's six equation model from 'Economic Fluctuations in the United States' is used to illustrate these approaches.

Original languageEnglish (US)
Pages (from-to)143-153
Number of pages11
JournalEuropean Economic Review
Volume6
Issue number2
DOIs
StatePublished - 1975
Externally publishedYes

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Welfare function
Certainty equivalence
Macroeconomic policy
Economic fluctuations
Constrained optimization
Usefulness

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Targets, instruments and generalized inverses. / Russell, Clifford S.; Smith, V. Kerry.

In: European Economic Review, Vol. 6, No. 2, 1975, p. 143-153.

Research output: Contribution to journalArticle

Russell, Clifford S. ; Smith, V. Kerry. / Targets, instruments and generalized inverses. In: European Economic Review. 1975 ; Vol. 6, No. 2. pp. 143-153.
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