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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
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Shu Lin Wee: Carnegie Mellon University

No 831, Staff Reports from Federal Reserve Bank of New York

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—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; 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-lab, nep-mac and nep-pke
Date: 2017-11-01, Revised 2018-08-01
Note: Previous Title: “Escaping Unemployment Traps”
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Working Paper: Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis (2018) Downloads
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