Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis

Sushant Acharya, Julien Bengui, Keshav Dogra and Shu Lin Wee

The Economic Journal, 2022, vol. 132, issue 646, 2007-2047

Abstract: We analyse monetary policy in a model where temporary shocks can permanently scar the economy’s productive capacity. Workers lose skill while unemployed and are costly to retrain, generating multiple steady-state unemployment rates. Following a large shock, unless monetary policy acts aggressively and quickly enough to prevent a significant rise in unemployment, hiring falls to a point where the economy recovers slowly at best—at worst, it falls into a permanent unemployment trap. Monetary policy can only avoid these outcomes if it commits in a timely manner to more accommodative policy in the future. Timely commitment is essential as the effectiveness of monetary policy is state dependent: once the recession has left substantial scars, monetary policy cannot speed up a slow recovery, or escape from an unemployment trap.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://hdl.handle.net/10.1093/ej/ueac016 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis (2018)
Working Paper: Slow recoveries and unemployment traps: monetary policy in a time of hysteresis (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:econjl:v:132:y:2022:i:646:p:2007-2047.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Economic Journal is currently edited by Francesco Lippi

More articles in The Economic Journal from Royal Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press () and ().