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Monetary Policy in a New Keynesian Model of Endogenous Growth

In: Endogenous Growth, Market Failures and Economic Policy

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  • Martin Zagler

    (Vienna University of Economics & BA)

Abstract

Empirical analysis, indicating a negative tradeoff between long-run growth and economic stability, appears sensitive with respect to policy intervention. Here I use a model of fully rational utility-maximizing representative agents and profit-maximizing firms acquiring rents by inventing a new product variety over which they have market power in a monopolistically competitive goods market to show that even a transitory increase in money supply exhibits positive, real long-run effects. The main transmission channel runs as follows: suppose that output is below potential output because of imperfect competition. An increase in real money balances due to an increase in money supply and sticky prices stimulates aggregate demand, leading to larger running profits. The larger incentive to enter the market fosters R & D, thereby raising the economy-wide rate of growth.

Suggested Citation

  • Martin Zagler, 1999. "Monetary Policy in a New Keynesian Model of Endogenous Growth," Palgrave Macmillan Books, in: Endogenous Growth, Market Failures and Economic Policy, chapter 5, pages 69-86, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-27129-0_5
    DOI: 10.1007/978-1-349-27129-0_5
    as

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