A New Keynesian Model with Endogenous Technology Trend

This paper extends a New Keynesian model with features of endogenous growth. This allows temporary shocks to have persistent effects, which in turn feeds back to short run demand and thus changes both the short and medium run response of the economy. The first major finding is that the model explains consumption crowding-in. Furthermore, monetary policy affects long run output, and the paradox of thrift can occur. Finally, the analysis is extended with a zero bound on monetary policy. Besides causing a long run loss in output, the loss of power of monetary policy causes a more severe short run de deflationary spiral in the presence of endogenous growth. Additionally, fiscal policy becomes much more powerful.