Slow Recoveries and Unemployment Traps
Author | : Sushant Acharya |
Publisher | : |
Total Pages | : 0 |
Release | : 2018 |
ISBN-10 | : OCLC:1085535748 |
ISBN-13 | : |
Rating | : 4/5 (48 Downloads) |
Book excerpt: We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers' skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best -- at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex-post, it must avoid them ex-ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack of swift monetary accommodation helps explain the European periphery's stagnation.