The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model. Issue 2 (3rd April 2019)

• Record Type: Journal Article
• Authors: Kam, Eric; Smithin, John; Tabassum, Aqeela
• Is Part Of: Review of political economy. Volume 31:Issue 2(2019)
• Page Start: 178
• Page End: 193
• Publication Date: 2019-04-03
• Subjects: Monetary non-neutrality -- endogenous time preference -- neo-Wicksellian model -- dynamic general equilibrium model -- interest rate rules; B12 -- B22 -- B26 -- E13 -- E43 -- E58; Economics -- Periodicals; Web sites; 330
• DOI: 10.1080/09538259.2019.1642551
• Languages: English
• ISSNs: 0953-8259

Abstract

ABSTRACT: This paper provides an explanation of the long-run non-neutrality of monetary policy in a dynamic general equilibrium (DGE) model with microfoundations. If the rate of time preference is endogenous there is no natural rate of interest. Therefore, if the central bank follows an interest rate rule this will affect the real rate of interest in financial markets and thereby the real economy. In principle, there is a negative relationship between the real rate of interest and the rate of inflation. This turns out to be nothing other than the historical forced savings effect, or the 20th century Mundell-Tobin effect.