Monetary policy and hysteresis in potential output

Daniel Kienzler and Kai Schmid

No 55, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

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 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.

Keywords: Monetary Policy; Hysteresis; Potential Output; Output Gap Mismeasurement (search for similar items in EconPapers)
JEL-codes: E32 E50 E52 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Working Paper: Monetary Policy and Hysteresis in Potential Output (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:55

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