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- Title
Hysteresis in Potential Output and Monetary Policy.
- Authors
Kienzler, Daniel; Schmid, Kai D.
- 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 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 amplification 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.
- Subjects
HYSTERESIS (Economics); MONETARY policy; PRODUCTION (Economic theory); ECONOMIC models; FINANCIAL crises; KEYNESIAN economics; ECONOMIC policy
- Publication
Scottish Journal of Political Economy, 2014, Vol 61, Issue 4, p371
- ISSN
0036-9292
- Publication type
Article
- DOI
10.1111/sjpe.12050