Optimal Control of the Macroeconomy with the Application to 2001 crisis of Turkey

Abstract

This paper concentrates on the application of optimal control theory to highlight some aspects of Turkish economy. First the setup is given for Turkey to grow over the balanced path. Then the optimal control problem is identified. The control and state variables are mentioned. The objective is the maximization of life-time discounted utility of the society through optimal choice of consumption which automatically determines investment. We make use of Bellman’s principle to guarantee optimality. We make necessary assumptions (technical assumptions) to make use of calculus techniques for a solution. Some functions to represent utility and production are specified. I used the econometric techniques to estimate some parameters of the functions to decide upon the optimal level of investment for steady-state in Turkey over the period including 2001 crisis. The corresponding differential equations are obtained as a result of the Hamiltonian defined. The phase diagram is prepared to analyse different trajectories.