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

Author

Listed:
  • Fabrice Collard

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

  • Patrick Fève

    (UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse, CNRS - Centre National de la Recherche Scientifique)

  • Philipp Wangner

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper explores how the persistence of demand shocks interacts with monetary policy in New Keynesian frameworks. We identify two key propagation channels: a permanent income channel, which amplifies the effects of persistent shocks, and a real interest rate channel, which goes in the opposite direction. The balance between these forces depends critically on the aggressiveness of the central bank's response to inflation, giving rise to distinct monetary policy regimes. Under accommodative policies, persistence magnifies the response of output, while aggressive policies dampen these effects. In the intermediate regime, a hump-shaped relationship emerges between persistence and the response of output. Our analysis extends to medium-scale DSGE models, featuring capital accumulation, household heterogeneity, behavioral frictions, working capital, nominal wage and price rigidities, revealing that these dynamics are remarkably robust.

Suggested Citation

  • Fabrice Collard & Patrick Fève & Philipp Wangner, 2025. "The Power of Persistence: How Demand Shocks and Monetary Policy Shape Macroeconomic Outcomes," Working Papers hal-04937974, HAL.
    • Handle: RePEc:hal:wpaper:hal-04937974
    Note: View the original document on HAL open archive server: https://hal.science/hal-04937974v1
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