Hysteresis from monetary policy mistakes: how bad could it be?
What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions...
- Autores:
-
Dávila Ospina, Andrés Octavio
- Tipo de recurso:
- Fecha de publicación:
- 2021
- Institución:
- Universidad de los Andes
- Repositorio:
- Séneca: repositorio Uniandes
- Idioma:
- eng
- OAI Identifier:
- oai:repositorio.uniandes.edu.co:1992/50892
- Acceso en línea:
- http://hdl.handle.net/1992/50892
- Palabra clave:
- Política monetaria
Histéresis (Economía)
Crecimiento endógeno (Economía)
Desempleo
Economía
- Rights
- openAccess
- License
- http://creativecommons.org/licenses/by-nc-nd/4.0/
| Summary: | What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions. The hysteresis effect comes from higher innovation costs that induce a drop in productivity growth, an indiscriminate firms' exit process, and a rise in unemployment. This article presents a theoretical model that rationalizes these mechanisms. The theory suggests that, in the long-run, even though growth recovers to its pre-shock rate and the economy converges to full firms' survival and full employment, the long-term output level is persistently lower than the level it would have reached in the absence of errors. How costly are monetary policy mistakes? |
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