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Endogenous growth and monetary policy: How do interest-rate feedback rules shape nominal and real transitional dynamics?

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  • Gil, Pedro Mazeda
  • Iglésias, Gustavo
  • Guimarães, Luís

Abstract

Monetary authorities have followed interest-rate feedback rules in apparently different ways over time and across countries, with the literature distinguishing, in particular, between active and passive monetary policies. We address the transitional-dynamics implications of these different types of monetary policy, in the context of a monetary growth model of R&D and physical capital accumulation. In this setup, well-behaved saddle-path transitional dynamics occurs under both active and (sufficiently) passive monetary policies – a relevant result little emphasised in the literature. We carry out our study from the perspective of a one-off shift in the structural stance of monetary policy (i.e., a change in the long-run inflation target) and a one-off shift in real industrial policy (i.e., an R&D or a manufacturing subsidy). We uncover a new channel through which institutional factors (the characteristics of the monetary-policy rule) influence the economies' convergence behaviour and through which monetary authorities may leverage (transitional) growth triggered by structural shifts.

Suggested Citation

  • Gil, Pedro Mazeda & Iglésias, Gustavo & Guimarães, Luís, 2023. "Endogenous growth and monetary policy: How do interest-rate feedback rules shape nominal and real transitional dynamics?," Journal of International Money and Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jimfin:v:138:y:2023:i:c:s0261560623001407
    DOI: 10.1016/j.jimonfin.2023.102939
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    More about this item

    Keywords

    Cash-in-advance; Endogenous growth; Feedback rule; Inflation; Monetary policy; Physical capital; R&D; Transitional dynamics;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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