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Title: Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis

Author(s): Sushant Acharya, Julien Bengui, Keshav Dogra and Shu Lin Wee

Publication Date: December 2018

Keyword(s): hysteresis, monetary policy, multiple steady states, path dependence and skill depreciation

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers' skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best â?? at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex-post, it must avoid them ex-ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack of swift monetary accommodation helps explain the European periphery's stagnation.

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Bibliographic Reference

Acharya, S, Bengui, J, Dogra, K and Wee, S. 2018. 'Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13409