Optimization Sensitivity Analysis of Production and Inflation in the Economy Based on an Optimal Control Model

T he purpose of this paper is to determine the optimal time paths of economic variables such as production, inflation, money stock and government expenditures, and also sensitivity analysis of these paths. For this aim, a deterministic optimal control model is used. In this model, a quadratic objective functional, due to the con- straint of dynamic macroeconomic equations system, will be minimized. In this method, the squared devia- tions of variables from their steady state values are weighted. Then, optimal paths of control and state vari- ables are calculated by using Mathematica software. Optimization results indicate that if optimal policies are chosen, mentioned variables will considerably have less fluctuations. According to results of survey, analyzing the sensitivity of the model to policy weight emphasizes on inverse relationship between weight imposed by economic policy makers on the target variable, and standard deviation of values of the optimal paths for that variable. Also, this paper shows that mathematical eco- nomic models and techniques can be used in order to solve the problems of growth, production and inflation.