Applications of Full State Feedback Control in Macroeconomic Policy

This thesis demonstrates the utility of feedback controls systems in guiding monetary policy by designing a state feedback control system from scratch to demonstrate its effectiveness. We first demonstrate the strong parallel between feedback control systems and the formulation of monetary policy. The advantages of full state feedback over other techniques such as PID and model predictive control are discussed. In addition, data-driven machine learning control and its potential for augmented monetary policy is also discussed. For the purposes of this undergraduate thesis, an enhanced version of the three equation keynesian economic model will be used to design a corresponding state feedback controller. The parameters of the state feedback control system can be varied to reflect various prominent economies in the 21st century. With our control system – a one percent inflation shock will be utilized with parameters that reflect the United States economy to obtain the optimal interest rate policy for the Federal Reserve. The process for designing the state feedback control system is fully outlined.