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Slow recoveries and unemployment traps: monetary policy in a time of hysteresis

Author

Listed:
  • Acharya, Sushant

    (Federal Reserve Bank of New York)

  • Bengui, Julien

    (Université de Montréal)

  • Dogra, Keshav

    (Federal Reserve Bank of New York)

  • Wee, Shu Lin

    (Carnegie Mellon University)

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.

Suggested Citation

  • Acharya, Sushant & Bengui, Julien & Dogra, Keshav & Wee, Shu Lin, 2017. "Slow recoveries and unemployment traps: monetary policy in a time of hysteresis," Staff Reports 831, Federal Reserve Bank of New York, revised 01 Aug 2018.
  • Handle: RePEc:fip:fednsr:831
    Note: Previous Title: “Escaping Unemployment Traps”
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    References listed on IDEAS

    as
    1. Sanjay Singh, 2018. "Output Hysteresis and Optimal Monetary Policy," 2018 Meeting Papers 554, Society for Economic Dynamics.
    2. Laureys, Lien, 2014. "Optimal monetary policy in the presence of human capital depreciation during unemployment," LSE Research Online Documents on Economics 58006, London School of Economics and Political Science, LSE Library.
    3. Mathieu Taschereau-Dumouchel & Edouard Schaal, 2015. "Coordinating Business Cycles," 2015 Meeting Papers 178, Society for Economic Dynamics.
    4. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    5. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-1466, June.
    6. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    7. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
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    More about this item

    Keywords

    hysteresis; monetary policy; multiple steady states; skill depreciation;

    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
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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