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Hysteresis in Potential Output and Monetary Policy

  • Kienzler, Daniel

    ()

  • Schmid, Kai D.

    ()

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 New Keynesian 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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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1328.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1328.

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Length: 34 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:usg:sfwpfi:2013:28
Contact details of provider: Phone: +41 71 243 40 11
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Web page: http://www.unisg.ch/de/Schools/Finance.aspx

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