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Hysteresis and Cost-Push Inflation: which Implications for Monetary Policy?

Author

Listed:
  • Gabriel Brondino

    (Department of Economics and Social Sciences – Università Cattolica del Sacro Cuore, Piacenza)

  • Lorenzo Di Domenico

    (Department of Economics and Finance – Università Cattolica del Sacro Cuore, Milano)

  • Davide Romaniello

    (Department of Economics – Università Roma Tre)

Abstract

The spectre of inflation is haunting Europe. In 2021, inflation rose to levels not seen since the 1980s. The increase in energy prices is mostly to blame. What is the proper monetary policy stance to adopt in this context? Several arguments are at variance with the effectiveness of the standard restrictive monetary policy. On the one hand, the presence of ‘hysteresis’ suggests that a restrictive monetary policy can have long-lasting negative effects determining persistently lower employment and economic activity levels. Moreover, the cost-push nature of inflation casts doubt on the effectiveness of current monetary policy. This paper argues that trying to deflate the economy by raising interest rates and limiting the growth of demand may be self-defeating. Therefore, after showing the meaning and the functioning of hysteresis, we argue that restrictive monetary policy can produce a persistent negative effect on output without reducing the inflation rate.

Suggested Citation

  • Gabriel Brondino & Lorenzo Di Domenico & Davide Romaniello, 2023. "Hysteresis and Cost-Push Inflation: which Implications for Monetary Policy?," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 131(2), pages 273-290.
    • Handle: RePEc:vep:journl:y:2023:v:131:i:2:p:273-290
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    More about this item

    Keywords

    inflation; hysteresis; unemployment; distributive conflict;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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