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Optimal Control of the Money Supply

Staff Report 82 | Published February 1, 1983

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Author

Robert B. Litterman

Optimal Control of the Money Supply

Abstract

Using optimal control theory and a vector autoregressive representation of the relationship between money and interest rates, one can derive a feedback control procedure which defines the best possible tradeoff between money supply fluctuations and interest rate volatility and which could be used to reduce both from their current levels.