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. 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?

• Autores: Dávila Ospina, Andrés Octavio
• 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/