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Monetary Policy and Hysteresis in Potential Output

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  • Daniel Kienzler
  • Kai Daniel Schmid

Abstract

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.

Suggested Citation

  • Daniel Kienzler & Kai Daniel Schmid, 2013. "Monetary Policy and Hysteresis in Potential Output," IMK Working Paper 116-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:116-2013
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    Cited by:

    1. Annabelle Mourougane, 2017. "Crisis, potential output and hysteresis," International Economics, CEPII research center, issue 149, pages 1-14.

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    More about this item

    Keywords

    Monetary Policy; Hysteresis; Potential Output; Output Gap Mismeasurement;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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