Monetary Policy in a New Keynesian Model of Endogenous Growth
Empirical analysis, indicating a negative tradeoff between long-run growth and economic stability, appears sensitive with respect to policy intervention. Here I use a model of fully rational utility-maximizing representative agents and profit-maximizing firms acquiring rents by inventing a new product variety over which they have market power in a monopolistically competitive goods market to show that even a transitory increase in money supply exhibits positive, real long-run effects. The main transmission channel runs as follows: suppose that output is below potential output because of imperfect competition. An increase in real money balances due to an increase in money supply and sticky prices stimulates aggregate demand, leading to larger running profits. The larger incentive to enter the market fosters R & D, thereby raising the economy-wide rate of growth.
KeywordsMonetary Policy Money Supply Endogenous Growth Aggregate Demand Money Demand
Unable to display preview. Download preview PDF.