Hysteresis Effects and Macroeconomics Gains from Unconventional Monetary Policies Stabilization

Based on the Great Recession, this paper investigates the slow recovery-following recessions and the ability of unconventional monetary policies to dampen the adverse effects of shocks. The purpose is to elucidate one of the paradoxes of the business cycle—the slow pace of recovery of macroeconomic indicators and to evaluate the gains from monetary policies initiated by central banks following the financial crisis of 2008. Therefore, the article develops a model by integrating hysteresis mechanisms, modelled by the segmentation of the labour market between insiders and outsiders in the structure of a model with financial frictions to explain the paradox related to production and employment. Financial frictions are incorporated into the model by using a moral hazard problem between financial institutions and households. Calibrated on the U.S. economy, the simulations of the model show that the pace of recovery of output and employment takes more than 6 years to get back to the trend after the shocks. The cost in terms of the welfare of this slow recovery ranges between 0.30% to 5.82% according to the importance of the insiders-outsiders phenomenon. According to the baseline calibration of the model, the simulations also show that credit easing helps to strongly limit the effects and the costs in terms of welfare induced by these hysteresis mechanisms. Output and unemployment begin to converge towards their pre-shock simulations respectively 2.5 years, and 3 years when the central bank intervenes with credit easing. Welfare gains vary from 3.55% to 4.30%.