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The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model

Author

Listed:
  • Eric Kam

    (Department of Economics, Ryerson University, Toronto, Canada)

  • John Smithin

    (Department of Economics, York University, Toronto, Canada)

  • Aqeela Tabassum

    (The Business School, Humber College, Toronto, Canada)

Abstract

This paper provides an explanation of the long-run neutrality of monetary policy in a dynamic general equilibrium model with micro-foundations. 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 twentieth century Mundell-Tobin effect.

Suggested Citation

  • Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp074
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