This book was started while the first author was at Imperial College, London, and the second author at the University of Rotterdam. It began with the objective of first covering the standard optimal-control theory – largely imported from mathematical control theory – and parallel developments in economics associated with Timbergen and Theil; then secondly to relate this work to recent developments in rational-expectations modelling. However, the rate of progress has been such that the original objectives have been revised in the light of many interesting developments in the theory of policy formulation under rational expectations, particularly those concerned with the issues of time inconsistency and international policy coordination. The first six chapters are devoted to various aspects of conventional control theory but with an emphasis on uncertainty. The remaining four chapters are devoted to the implications of rational, or forward-looking, expectations for optimal-control theory in economics. We also examine the increasing use which has been made of game-theoretic concepts in the policy-formulation literature and how this is relevant to understanding how expectations play a role in policy.

We owe many debts to colleagues past and present. A number of people have read and commented upon previous drafts of this book. In particular we are grateful to Andreas Bransma, Bob Corker, Berc Rustem, John Driffill, Sheri Markose, Mark Salmon and Paul Levine. We also owe a particular debt of gratitude to Francis Brooke, whose editorial patience was inexhaustible.