Lower for longer under endogenous technology growth
Michaela Elfsbacka Schmöller and
No 2714, Working Paper Series from European Central Bank
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. JEL Classification: E24, E31, E32, E52, O30
Keywords: cycle-trend interaction; endogenous TFP; hysteresis; make-up strategies; ZLB (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222714
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