Lower for Longer Under Endogenous Technology Growth

52 Pages Posted: 1 Apr 2022 Last revised: 2 Apr 2022

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2022

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

JEL Classification: E24, E31, E32, E52, O30

Suggested Citation

Elfsbacka Schmöller, Michaela and Spitzer, Martin, Lower for Longer Under Endogenous Technology Growth (March 31, 2022). Bank of Finland Research Discussion Paper No. 6/2022, Available at SSRN: https://ssrn.com/abstract=4072346 or http://dx.doi.org/10.2139/ssrn.4072346

Michaela Elfsbacka Schmöller (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Martin Spitzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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