Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253691 
Year of Publication: 
2022
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 6/2022
Publisher: 
Bank of Finland, Helsinki
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.
Subjects: 
Make-up Strategies
ZLB
Endogenous TFP
Hysteresis
Cycle-Trend Interaction
JEL: 
E24
E31
E32
E52
O30
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-403-1
Document Type: 
Working Paper

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