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

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  • FABRICE COLLARD

  • PATRICK FÈVE

  • PHILIPP WANGNER

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.

Suggested Citation

  • Fabrice Collard & Patrick Fève & Philipp Wangner, 2026. "The Power of Persistence How Demand Shocks and Monetary Policy Shape Macroeconomic Outcomes," CRC TR 224 Discussion Paper Series crctr224_2025_785, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_785
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    References listed on IDEAS

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    1. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 329-360.
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    3. Florin O. Bilbiie & Giorgio Primiceri & Andrea Tambalotti, 2023. "Inequality, Risk, and Business Cycles," NBER Working Papers 31729, National Bureau of Economic Research, Inc.
    4. Cai, Michael & Del Negro, Marco & Giannoni, Marc P. & Gupta, Abhi & Li, Pearl & Moszkowski, Erica, 2019. "DSGE forecasts of the lost recovery," International Journal of Forecasting, Elsevier, vol. 35(4), pages 1770-1789.
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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