DP13409 Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis
|Author(s):||Sushant Acharya, Julien Bengui, Keshav Dogra, Shu Lin Wee|
|Publication Date:||December 2018|
|Keyword(s):||hysteresis, monetary policy, multiple steady states, path dependence, skill depreciation|
|JEL(s):||E24, E3, E5, J23, J64|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13409|
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.