On The Effect of Money on Growth within an Optimal Control Framework

Pinmanee Vajrapatkul; Adirek Vajrapatkul

doi:10.66445/twe.v44i3.277364

Authors

Pinmanee Vajrapatkul Computer Engineering Department, Srinakharinwirot University, Thailand
Adirek Vajrapatkul School of Economics, Sukhothai Thammathirat Open University, Thailand https://orcid.org/0000-0002-6348-8977

DOI:

https://doi.org/10.66445/twe.v44i3.277364

Keywords:

Money supply, Capital accumulation, Interest rates, Price, Optimal control, Hamiltonian

Abstract

This study addresses a gap in the monetary policy literature by examining the dynamic relationships between money supply, the money-interest rate sensitivity parameter, and key economic indicators, including consumption, money demand, capital, price, and interest rates, using an optimal control framework and Hamiltonian approach. Crucially, the model incorporates money as a factor in the Cobb-Douglas production function, alongside capital and labor, and as a component of the utility function, to offer a holistic view of money's role in the economy. The key findings derived from the simulation results show a positive relationship between money supply and capital, confirming that monetary expansion can stimulate economic growth. It also reveals an inverse relationship between the money supply and price after the initial interval, which contradicts the traditional inflation expectations of the Quantity Theory of Money. Furthermore, the study identifies that when the money-interest rate sensitivity parameter is set high, it exhibits volatile dynamics across all the variables. Therefore, while expansionary monetary measures can stimulate economic growth, policymakers must design optimal levels of money supply and money-interest rate sensitivity parameters to achieve economic stability and growth.

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