Short- and long-run tradeoff of monetary easing

Research output: Contribution to journalArticle

Abstract

In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. Although a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. When calibrated to the U.S. economy, the model suggests that the adverse effect dominates in the long run.

Original languageEnglish
JournalJournal of the Japanese and International Economies
DOIs
Publication statusAccepted/In press - 2018 Jan 1

Fingerprint

equilibrium model
costs
substitution
inflation
reward
innovation
economy
Short-run
Creative destruction
Menu costs
Trade-offs
Sticky prices
Dynamic stochastic general equilibrium model
Endogenous growth
Inflation
Product substitution
Reward
US economy
Price stickiness
Payment

Keywords

  • New Keynesian
  • Non-neutrality of money
  • Schumpeterian

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

Cite this

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abstract = "In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. Although a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. When calibrated to the U.S. economy, the model suggests that the adverse effect dominates in the long run.",
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AB - In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. Although a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. When calibrated to the U.S. economy, the model suggests that the adverse effect dominates in the long run.

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