Can Budgetary Policy Planning Be Improved by Optimal Control Methods? A Case Study for Austria

Reinhard Neck
University of Osnabrueck
Neck@rols1.oec.Uni-Osnabrueck.de

Abstract

Using the stochastic control algorithm OPTCON, we determine approximately optimal budgetary policies for Austria for the period 1995 to 2000 within the framework of a problem of quantitative economic policy. An intertemporal objective function is minimized subject to the constraints of the macroeconometric model FINPOL3, estimated for Austria using 3SLS. Exogenous variables of the model are forecast by time series methods. The results show that optimal budgetary policies can improve upon the performance of the Austrian economy with respect to some policy objectives as compared to a simulation using extrapolations of policy variables. Optimal budgetary policies for Austria are shown to depend strongly on global developments as reflected in Austrian exports and import prices.