Innovation, Growth and Optimal Monetary Policy
42 Pages Posted: 5 Apr 2016
Date Written: February 2016
This paper examines how the mechanism driving growth in the economy is likely to affect the optimal monetary policy response to shocks. We consider the Ramsey policy in a New Keynesian model in which growth is sustained by the creation of new patented technologies through R&D and we compare the results obtained with those arising when growth is exogenous. We find that optimal monetary policy must be counter-cyclical in face of both technology and public spending shocks, but the intensity of the reaction crucially depends on the underlying growth mechanism.
Keywords: Endogenous Growth, R&D, Optimal Monetary Policy, Ramsey Problem
JEL Classification: E32, E52, O42
Suggested Citation: Suggested Citation