Hysteresis in Potential Output and Monetary Policy

Daniel Kienzler () and Kai Schmid

No 1328, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We show that actively stabilizing economic activity plays a more prominent role in the conduct of monetary policy when potential output is subject to hysteresis. We augment a basic New Keynesian model by hysteresis in potential output and contrast simulation outcomes of this extended model to the standard model. We find that considering hysteresis allows for a more realistic propagation of macroeconomic shocks and persistent movements in output after monetary shocks. Our central policy implication of active output gap stabilization arises from stability analyses and welfare considerations.

Keywords: Monetary Policy; Hysteresis; Potential Output; Output Gap Mismeasurement (search for similar items in EconPapers)
JEL-codes: E32 E50 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1328.pdf (application/pdf)

Related works:
Journal Article: Hysteresis in Potential Output and Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2013:28

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