Hysteresis and full employment in a small open economy

Timothy Watson and Juha Tervala

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We simulate a small open economy Two Agent New Keynesian (TANK) model featuring ‘learning by doing’ in production whereby changes in employment generate hysteresis in productivity and output. Credit constraints and hysteresis amplify the efficacy of Fiscal stimulus in a small open economy with a floating exchange rate and inflation-targeting central bank such that output multipliers can exceed unity; welfare multipliers can be positive; and the degree of hysteresis, output and employment multipliers match empirical evidence well. Fiscal stimulus helps reverse output hysteresis, and price-level targeting provides superior macroeconomic stabilisation compared to other simple monetary rules combined with fiscal stimulus.

Keywords: Hysteresis; open economy macroeconomics; monetary policy; fiscal policy (search for similar items in EconPapers)
JEL-codes: E32 E63 F41 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2021-46

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