The Power of Persistence: How Demand Shocks and Monetary Policy Shape Macroeconomic Outcomes

Fabrice Collard, Patrick Feve and Philipp Wangner

No 21694, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Does a more persistent demand shock always generate a larger output response? Conventional wisdom says yes: forward-looking agents front-load spending in anticipation of higher lifetime resources, and the more lasting the shock, the stronger the expansion. This paper shows that this logic fails in New Keynesian models with an active monetary policy. The interplay between persistence and monetary policy stance governs a fundamental trade-off between two opposing forces: a permanent income channel that amplifies output, and a real interest rate channel that dampens it. Their balance generates three monetary policy regimes. In the empirically relevant intermediate regime, the output multiplier is hump-shaped in persistence.

Keywords: Monetary policy; Demand shocks; New keynesian model; Persistence (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Date: 2026-07
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