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Monetary Policy and Hysteresis in Potential Output

  • Daniel Kienzler
  • Kai Daniel Schmid

We show that actively stabilizing economic activity plays a more prominent role in the conduct of monetary policy when potential output is subject to hysteresis. We augment a basic NewKeynesian model by hysteresis in potential output and contrast simulation outcomes of this extended model to the standard model. We find that considering hysteresis allows for a more realistic propagation of macroeconomic shocks and persistent movements in output after monetary shocks. Our central policy implication of active output gap stabilization arises from stability analyses and welfare considerations.

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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 116-2013.

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Length: 34 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:imk:wpaper:116-2013
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