Introduction

By direct analogy with the static theory of policy, dynamic policy problems arise from the interaction of a dynamic policy objective with a dynamic policy model. This chapter develops the analytical framework required for a dynamic theory of policy; and therefore does so by specifying a variety of policy models and of policy objectives. The actual interaction of policy model and policy objective will be studied in ensuing chapters.

As for the static theory of policy, the structural form and reduced form are conventional representations of thedynamic policy model. With economic structure fixed, certain, and linear, the choice between either of these representations is one of convenience; as for the static theory of policy the reduced form is typically preferred. Some added variety appears in the dynamic framework because of the introduction of the linear system representation, also known as the state space form, of the policy model. State space models have been widely employed in the dynamic policy literature in recent years, largely because of certain analytical advantages enjoyed by this representation over the orthodox reduced form representation of the policy model. For a unified dynamic theory of policy, a clear appreciation of the interrelationship between the reduced form representation and the linear system representation is imperative and this will be one of the objectives of Chapter 4.

While the policy model can thus be represented in various forms – the structural form, reduced form, or state space form – provided these are truly equivalent such representational variety cannot be responsible for generating varieties of dynamic policy problems.