Medium-Term Money Neutrality and the Effective Lower Bound
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 non-existence of equilibria at the effective lower bound (ELB) on interest rates. Non-existence 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.
This paper was written for the 50th anniversary conference of the Journal of Money, Credit and Banking. We thank Antoine Martin, our discussant Christopher Gust and two anonymous referees for their comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Dallas or the Federal Reserve System.
Gauti B. Eggertsson & Marc P. Giannoni, 2020. "Medium‐Term Money Neutrality and the Effective Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 561-600, December. citation courtesy of