The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model

Eric Kam (), John Smithin () and Aqeela Tabassum ()
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Eric Kam: Department of Economics, Ryerson University, Toronto, Canada
John Smithin: Department of Economics, York University, Toronto, Canada
Aqeela Tabassum: The Business School, Humber College, Toronto, Canada

No 74, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: This paper provides an explanation of the long-run neutrality of monetary policy in a dynamic general equilibrium model with micro-foundations. If the rate of time preference is endogenous there is no natural rate of interest. Therefore, if the central bank follows an interest rate rule this will affect the real rate of interest in financial markets and thereby the real economy. In principle, there is a negative relationship between the real rate of interest and the rate of inflation. This turns out to be nothing other than the historical “forced savings effect”, or the twentieth century Mundell-Tobin effect.

Pages: 23 pages
Date: 2018-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rye:wpaper:wp074

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