Medium-Term Money Neutrality and the Effective Lower Bound

Gauti Eggertsson and Marc Giannoni

No 27669, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Conventional wisdom suggests that medium-term money neutrality imposes strong limitations on the effects of monetary policy. The point of this paper is that models with medium- and long-term money neutrality are prone to generate non-existence of equilibria at the effective lower bound (ELB) on interest rates. Non-existence is suggestive of sharp output contractions --- so-called contractionary black holes --- at the ELB. Paradoxically, the case for expansionary monetary policy at the ELB is even stronger in models that feature near money neutrality. The results highlight the benefits of a monetary policy regime in which the central bank temporarily overshoots its inflation target once confronted by the ELB.

JEL-codes: E0 E13 E40 E58 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: ME
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Citations: View citations in EconPapers (2)

Published as Gauti B. Eggertsson & Marc P. Giannoni, 2020. "Medium‐Term Money Neutrality and the Effective Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 561-600, December.

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