The monetary growth order

TL;DR

This paper proposes replacing the standard exponential growth model of monetary assets with a generalized model using a reaction order p, allowing better alignment with real economic growth and potential crisis control.

Contribution

It introduces the concept of monetary growth order p, a new parameter to control monetary growth, offering an alternative to exponential compounding.

Findings

The new model can adjust monetary growth to match economic fundamentals.

It provides a potential tool for central banks to manage financial stability.

The model suggests a flexible approach to monetary policy during crises.

Abstract

Growth of monetary assets and debts is commonly described by the formula of compound interest which for the case of continuous compounding is the exponential growth law. Its differential form is dc/dt = i c where dc/dt describes the rate of monetary growth, i the compounded interest rate and c the actual principal. Exponential growth of this type is fixed to be neither resource-limited nor self-limiting which is in contrast to real economic growth (such as the GDP) which may have exponential, but also subexponential, linear, saturation, and even decline phases. As a result assets and debts commonly outgrow their economic fundament giving rise to the financial equivalent of Malthusian catastrophes after a certain interval of time. We here introduce an alternative for exponential compounding and propose to replace dc/dt = i c by dc/dt = i c^p where the exponent p (called reaction order in chemistry) is a quantity which will be termed monetary growth order. The monetary growth order p is seen as a tuning handle which enables to adjust gross monetary growth to real economic growth. It is suggested that the central banks take a serious look to this control instrument which allows tuning in crisis situations and immediate return to the exponential norm if needed.