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Medium‐Term Money Neutrality and the Effective Lower Bound

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  • GAUTI B. EGGERTSSON
  • MARC P. GIANNONI

Abstract

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 nonexistence of equilibria at the effective lower bound (ELB) on interest rates. Nonexistence 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.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:s2:p:561-600
    DOI: 10.1111/jmcb.12762
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    2. Mazelis, Falk & Motto, Roberto & Ristiniemi, Annukka, 2023. "Monetary policy strategies for the euro area: optimal rules in the presence of the ELB," Working Paper Series 2797, European Central Bank.

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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