Slow Recoveries and Unemployment Traps

Monetary Policy in a Time of Hysteresis

Bibliographic Data

ID9949889
AuthorsSushant Acharya (0000-0002-9155-8127, Bank of Canada, Canada & CEPR , UK), Julien Bengui (Bank of Canada, Canada & CEPR , UK), Keshav Dogra (Federal Reserve Bank of New York), Shu Lin Wee (Bank of Canada)
Year2022
Volume132
Issue646
Pages2007-2047
Publication date2022-04-05
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1093/ej/ueac016
OpenAlexW2771956133
LanguageEN
Citations received1
References cited27

We analyse monetary policy in a model where temporary shocks can permanently scar the economy’s productive capacity. Workers lose skill while unemployed and are costly to retrain, generating multiple steady-state unemployment rates. Following a large shock, unless monetary policy acts aggressively and quickly enough to prevent a significant rise in unemployment, hiring falls to a point where the economy recovers slowly at best—at worst, it falls into a permanent unemployment trap. Monetary policy can only avoid these outcomes if it commits in a timely manner to more accommodative policy in the future. Timely commitment is essential as the effectiveness of monetary policy is state dependent: once the recession has left substantial scars, monetary policy cannot speed up a slow recovery, or escape from an unemployment trap

Economics · Full employment · Great recession · Hysteresis · Keynesian economics · Macroeconomics · Monetary economics · Monetary policy · Point (geometry · Recession · Unemployment · Zero lower bound · Economic Policies and Impacts · Economic theories and models · Monetary Policy and Economic Impact

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