Output hysteresis and optimal monetary policy

Vaishali Garga and Sanjay Singh

Journal of Monetary Economics, 2021, vol. 117, issue C, 871-886

Abstract: We derive a fully quadratic approximation to welfare under endogenous growth and study optimal monetary policy. Away from the ZLB, optimal commitment policy sets interest rates to eliminate output hysteresis. A strict inflation targeting rule implements the optimal policy. At the ZLB, strict inflation targeting is sub-optimal and admits output hysteresis, defined as a permanent loss in potential output. A new policy rule that targets output hysteresis returns the output to the pre-shock trend and approximates the welfare gains under optimal commitment policy. A central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output.

Keywords: Output hysteresis; Optimal monetary policy; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 O31 O43 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Related works:
Working Paper: Output Hysteresis and Optimal Monetary Policy (2019)
Working Paper: Output Hysteresis and Optimal Monetary Policy (2019)
Working Paper: Output Hysteresis and Optimal Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:871-886

DOI: 10.1016/j.jmoneco.2020.06.005

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