Lower for longer under endogenous technology growth

Michaela Elfsbacka Schmöller and Martin Spitzer

No 6/2022, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper studies monetary policy strategies under endogenous technology dynamics and low r ∗ . Endogenous growth strengthens the gains from make-up strategies relative to inflation targeting, especially if policy space is reduced. This result is due to the long-run non-neutrality of money and the hysteresis effects in TFP through which ELB episodes generate permanent scars on long-run aggregate supply. Make-up strategies not only foster the alignment of inflation with target but also support productivity-improving investment in R&D and technology adoption and hence the long-run trend path, provided that the inherent make-up element is sufficiently pronounced. Inflation is less responsive to monetary policy due to the interaction with productivity dynamics. As a result, additional stimulus is required at the ELB and the degree of subsequent overshooting is alleviated. Endogenous growth also generates novel monetary policy trade-offs, most notably credibility challenges, which can be mitigated by confining make-up elements to ELB episodes.

Keywords: Make-up Strategies; ZLB; Endogenous TFP; Hysteresis; Cycle-Trend Interaction (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 E52 O30 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-gro
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2022_006

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