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

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

No 13409, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers' skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best â?? at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex-post, it must avoid them ex-ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack of swift monetary accommodation helps explain the European periphery's stagnation.

Keywords: hysteresis; monetary policy; multiple steady states; path dependence; skill depreciation (search for similar items in EconPapers)
JEL-codes: E24 E3 E5 J23 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2018-12
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Working Paper: Slow recoveries and unemployment traps: monetary policy in a time of hysteresis (2018) Downloads
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