Analysis the Non-Neutrality of Monetary Policy Effects through Nominal Interest Rate in the Generalized Sidrauski's Model in Iran's Economy: Optimal Control Approach

اقتصاد پولی مالی

Article 5, Volume 26, Issue 17, September 2019, Pages 109-136   

Document Type: پژوهشی

DOI: 10.22067/pm.v26i18.79490

Authors

Noor Olah Salehi Asfeji; Yaser Balaghi Inaloo

Shahid Bahonar University

Abstract

 
Sidrauski's (1967) model of money in the utility function in the framework of a neoclassical growth model, has analyzed the role of money in the economy. His conclusions suggest that money is super-neutral in the steady state. The basic research problem is generalized Sidrauski's model according to Reis (2007). Then, using optimal control approach, analysis the non-neutrality of monetary policy effects through nominal interest rate in the generalized Sidrauski's model. The results of calibration and sensitivity analysis of macroeconomic variables in Iranian economy indicate that as long as demand for real money balances elastic regard to nominal interest rate in non-separation utility function, monetary policy is not neutral in steady state. Therefore, a monetary policy that leads to a 3.6% decline in nominal interest rate growth, causing an increase in real money balances from 9.82 to 10.63. Finally, increased levels of capital per capita, output per capita and consumption per capita from 8.46, 2.90 and 2.38 to 9.42, 3.07 and 2.88. In addition, simulated results during the (1434-1344) in Iranian economy indicate that monetary policy, which leads to lower nominal rates, has increased the level of capital, production and consumption per capita continually.
Introduction
Although in macroeconomic literature related to rational expectations, where there is no monetary illusion and markets are settled, monetary policy has no real effect on the economy (Begg, 1980, Sidrauski, 1967, Lucas, 1972); but how the interaction between the real sector and Money is one of the questions that different economic schools have answered differently. In this context, various hypotheses have been put forward about the relationship between the real sector and the monetary sector of the economy: one hypothesis indicates that money is neutral in the long run. Other hypotheses suggest that money is super-neutral in the long run, but accepting or rejecting any of the above hypotheses affects the role of monetary policy in the economy.
In this regard, the main purpose of this study is to analyze the effects of monetary policy through nominal interest rates on the generalized Sidrasky model in the Iranian economy using the optimal control approach. The relevant analysis was first performed by calibrating and analyzing the sensitivity of macro variables in the steady state. Finally, the simulation of the macro-variable path is done.
 
Theoretical frame work
In the basic Sidrauski model (1967), as an extended model of the Ramsey model (1928), money is also entered for the first time along with consumption in the utility function. In this model, it is assumed that, first, the money supply increases at a constant rate over time. Second, in a steady state, the real balance of money is constant over time. Therefore, according to these two conditions, the super-neutral results of money are obtained.
 
Methodology
In this model, the economy as a unit is made up of the same households with an unlimited lifetime, and the representative households benefit from the actual consumption of goods and the actual balance of money. It is also a function of desirability, continuity, good behavior, mostly concurrent and increasing relative to  and the actual balances of money. Optimal control methods are used to solve the model and reach the optimal consumption path, real money balances and capital. By forming the Hamiltonian function, we will have maximization for the problem:
(1)     
Where the nominal interest rate.  is marginal utility of consumption. Necessary conditions are:
(2)                                                                           
(3)                                                                     
(4)                                                                          
 
Using Equilibrium Relationships (2) and (3) we will have:
(5)                                                                
 
Results & Discussion
The results of simulating the path of macro-pattern variables indicate that monetary policy, which leads to lower nominal interest rates, has continuously increased the level of capital, production, consumption, and real money balances.
 
Conclusions & Suggestions
The results of solving the model in the steady state indicate that with the elasticity of real money demand relative to the nominal rate in the inseparable utility function, the use of monetary policy that reduces the nominal interest rate, leads to increase in demand for real money. Eventually, it reduces the real interest rate. So, it leads to an increase in the level of per capita capital, production and consumption. Therefore, monetary policymakers are encouraged to apply monetary policy in line with optimal monetary policy to increase nominal variables through the channel of lower nominal interest rate channels.
 
 

Keywords

Super Neutral Money; capital accumulation; Monetary policy; Nominal Interest Rate; optimal control

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