Short- and Long-Run Tradeoff Monetary Easing
36 Pages Posted: 25 Nov 2015
Date Written: November 2015
In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. While a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. The model calibrated to the U.S. economy suggests that the adverse effect dominates in the long run.
Keywords: Schumpeterian, new Keynesian, non-neutrality of money
JEL Classification: E31, E58, O33, O41
Suggested Citation: Suggested Citation