Optimal Control of Private Investment and Consumption by Fiscal and Monetary Policy Tools within the 4th Five Year Development Plan



Economic Development Plans normally contain some policy objectives, especially for the most important macroeconomic variables. Governments are expected to take best policies to achieve these objectives, although due to some structural or other impediments they may fail to touch the objectives.
We have attempted to uncover the determinants of private consumption and investment as the objectives of the economic plan, via estimating a very simple model and then determine the government's best policy options in achieving the objectives or in a more precise words, determining best policy options for minimizing the deviations from the targets of the Fourth Five Year Development Plan, making use of an Optimal Control Theory method. Accordingly, we employed a deterministic class Quadratic Linear Tracking Problem to obtain the optimal trajectories for objective and policy/control variables. In addition to the private consumption and investment which were determined as objective variables, government expenditures and money stock were considered as control/policy variables representing fiscal and monetary policy, respectively.
The results of the study revealed that due to the Crowding-out Effect between government Expenditures and Private Investment during the period (1368-1383), which is considered a structural problem, the policymakers loose fiscal policy instrument in order to ascertain the objectives. Instead, they have to rely on the monetary policy instrument which may in turn cause inflation and make the economic plan deviate from its inflation targets.
JEL Classification: C53, C54, C61, E21, E22, E63