From Micro to Macro Hysteresis: Long-Run Effects of Monetary Policy

Felipe Alves and Giovanni Violante

Staff Working Papers from Bank of Canada

Abstract: We develop a Heterogeneous Agent New Keynesian model with a three-state frictional labour market that is consistent with the empirical evidence that (i) low-skilled workers are more exposed to the business cycle, (ii) displacement leads to long-lasting earnings losses, and (iii) unemployment is a stepping stone toward exit from the labor force. In this environment, a transient contractionary monetary policy shock induces a very persistent reduction in labour force participation and labour productivity, especially among workers at the bottom of the skill distribution. Despite the negative hysteresis on output, the model does not give rise to protracted deflation.

Keywords: Monetary Policy Transmission; Labour Markets (search for similar items in EconPapers)
JEL-codes: E21 E24 E31 E32 E52 J24 J64 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-lma, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:24-39

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