Monetary Policy, Multiple Equilibria And Hysteresis Effects On The Labor Market
In this paper we demonstrate that a standard loss function of a central bank may generate multiple equilibria which can contribute to hysteresis effects on the labor market. Multiple equilibria are feasible if the objective function of the central bank is non-quadratic. Such preferences may arise if the weights for output and inflation stabilization are state dependent, for example, if output stabilization is more important for low levels of actual output compared to higher levels (or inflation stabilization is more important for high inflation rates than for low rates). As further shown (in the appendix of the paper) non-quadratic central bank preferences may also be due to other reasons. We show how both the Hamiltonian function as well as the Bellman equation can be used to solve the monetary control problem with multiple equilibria.
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|Date of creation:||05 Jul 2000|
|Contact details of provider:|| Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain|
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Web page: http://enginy.upf.es/SCE/
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