Optimal Control Indicators for the Assessment of the Influence of Monetary Policy to Business Cycle Shocks

A linear control system in the form of a vector autoregressive (VAR) model with an input is considered. The system comprises a set of macroeconomic variables as inputs, states and outputs. The state variables included are the cyclical components of gross domestic product (GDP) and the rate of unemployment. The input variable is the threemonth Central Bank official lending rate. Since all state variables are measured the state vector is also the output vector. In this setting we assess the possibility of smoothing the effect of a single large negative business cycle shock (impulse) to GDP via shaping the short-term nominal rate of interest and propose optimal control indicators measuring the control potential of this Central Bank action. The results obtained indicate that the actions of the Central Bank improved the performance of the dynamical system, a fact reflected on the indicators. These results contribute to the existing knowledge on the effectiveness of monetary policy as a short-run stabilization device which is still an open issue