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Medium‐Term Money Neutrality and the Effective Lower Bound
Author(s) -
EGGERTSSON GAUTI B.,
GIANI MARC P.
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12762
Subject(s) - neutrality , economics , monetary policy , inflation (cosmology) , monetary economics , term (time) , keynesian economics , point (geometry) , physics , philosophy , mathematics , geometry , epistemology , quantum mechanics , theoretical physics
Conventional wisdom suggests that medium‐term money neutrality imposes strong limitations on the effects of monetary policy. The point of this paper is that models with medium‐ and long‐term money neutrality are prone to generate nonexistence of equilibria at the effective lower bound (ELB) on interest rates. Nonexistence is suggestive of sharp output contractions—so‐called contractionary black holes—at the ELB. Paradoxically, the case for expansionary monetary policy at the ELB is even stronger in models that feature near money neutrality. The results highlight the benefits of a monetary policy regime in which the central bank temporarily overshoots its inflation target once confronted by the ELB.