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

• Published in: Journal of international money and finance Vol. 138; p. 102939
• Main Authors: Gil, Pedro Mazeda, Iglésias, Gustavo, Guimarães, Luís
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01-11-2023
• Subjects: Cash-in-advance; Endogenous growth; Feedback rule; Inflation; Monetary policy; Physical capital; R&D; Transitional dynamics; R&D; E41; Inflation; Endogenous growth; Feedback rule; Physical capital; Transitional dynamics; Monetary policy; O31; O41; Cash-in-advance
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2023.102939

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.
•Monetary authorities have followed interest-rate feedback rules in different ways.•The literature distinguishes between active and passive monetary policies.•We look into the macro-dynamical behaviour generated by the different feedback rules.•Saddle-path dynamics occurs under active and sufficiently passive monetary policies.•We study shifts in the structural stance of monetary policy and in industrial policy.