Monetary policy with persistent supply shocks

Galo Nuño, Philipp Renner and Simon Scheidegger
Additional contact information
Galo Nuño: BANCO DE ESPAÑA, CEMFI, CEPR
Philipp Renner: UNIVERSITY OF LANCASTER
Simon Scheidegger: UNIVERSITY OF LAUSANNE

No 2529e, Working Papers from Banco de España

Abstract: This paper studies monetary policy in a New Keynesian model with persistent supply shocks, that is, sustained increases in production costs due to factors such as wars or geopolitical fragmentation. First, we demonstrate that Taylor rules fail to stabilize long-term inflation due to endogenous shifts in the natural interest rate. Second, we analyze optimal policy responses under discretion and commitment. Under discretion, a systematic inflationary bias emerges when the shock impacts the economy. Under commitment, the optimal policy adopts a lean-against-the-wind approach without compensating for past inflation, implying that “bygones are bygones”. This result is reinforced if monetary policy is constrained by the zero lower bound.

Keywords: deep learning; Markov switching model; cost-push shocks (search for similar items in EconPapers)
JEL-codes: E32 E58 E63 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2025-06
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 25/Files/dt2529e.pdf First version, June 2025 (application/pdf)

Related works:
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:bde:wpaper:2529

DOI: 10.53479/40165

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().