Monetary Policy With Constant Real Stock Of Bonds

The equilibrium growth path stated in this paper is based on the IS-LM- SRAS model augmented with the dynamics of expected inflation and real wealth, developed by Sidrauski and Turnovski . In our previous papers, we computed the IS-LM equilibrium for the linear model and defined the dynamic system. In this work, we estimated the parameters using statistical data for Romania during 2001Q2-2014Q2 and computed the multipliers. These parameters and multipliers were further used to compute the coefficients of the two dimensional dynamic system. We further augmented the dynamic system, with an objective function, reflecting the sum of the square differences of the real actual government expenditures, from the values established by fiscal policy. We applied the Pontryagin’s Principle in order to compute the optimal conditions of the optimal control problem. The overall dynamics of the economy is computed for short run, considering the monetary policy of constant stock of bound, using Runge-Kutta algorithm in MATLAB. The dynamics of the system was analyzed via phase diagram. The results reflect the fact that the economy is in an unstable zone, with expected inflation decreasing and real wealth increasing, fact that determines us to add an objective function for minimizing the square differences of the government expenditures from the stationary ones during 2016Q1-2017Q4.