Monetary Policy Impacts Long-Term Growth, Sparking Consumption Boom and Fiscal Shift
The New Keynesian model with endogenous technology trend shows that temporary shocks can have lasting effects on the economy. This leads to changes in both short and medium-term responses. The model explains consumption crowding-in and how monetary policy affects long-term output. The zero bound on monetary policy can cause a loss in output and a more severe deflationary spiral. Fiscal policy becomes more powerful in this scenario.