Hysteresis From Monetary Policy Mistakes: How Bad Could It Be?

Andrés O. Dávila-Ospina ()
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Andrés O. Dávila-Ospina: Universidad de los Andes
Authors registered in the RePEc Author Service: Andrés O. Dávila Ospina

No 21003, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions. The hysteresis effect comes from higher innovation costs that induce a drop in productivity growth, an indiscriminate firms’ exit process, and a rise in unemployment. This article presents a theoretical model that rationalizes these mechanisms. The theory suggests that, in the longrun, even though growth recovers to its pre-shock rate and the economy converges to full firms’ survival and full employment, the long-term output level is persistently lower than the level it would have reached in the absence of errors.

Keywords: Hysteresis; Monetary Policy; Endogenous Growth; Productivity; Firms’ Exit; Unemployment. (search for similar items in EconPapers)
JEL-codes: E52 E58 O11 O40 O41 O42 O47 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2023-12-13
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:021003

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