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Working Paper
Monetary Policy in a Model of Growth
Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected ...
Working Paper
Demand Shocks, Hysteresis and Monetary Policy
This paper builds a micro-founded general equilibrium model of hysteresis in which changing composition of firms with heterogeneous qualities in response to demand shocks alter the total factor productivity of the economy through a process of "creative destruction". Hysteresis fundamentally challenges existing consensus on stabilization policies: the complete stabilization of demand shocks becomes suboptimal as demand creates its own supply; fiscal multiplier can be substantially larger than 1; an opportunistic monetary policymaker, who adopts a lenient policy reaction to positive demand ...
Working Paper
Searching for Hysteresis
Working Paper
Estimating Hysteresis Effects
In this paper we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the Great Recession is included in the sample. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, while output per worker is largely unaffected. We find strong evidence that hysteresis transmits through a rise in long-term unemployment and a decline in labor force participation and disproportionately ...
Working Paper
Hysteresis via Endogenous Rigidity in Wages and Participation
We document that the past three ?jobless? recoveries also featured asymmetries in labor force participation and labor compensation, with each falling to new lows during each cycle. We model these asymmetries as resulting from a strategic complementarity in firms' wage setting and workers' job search strategies. Strategic complementarity results in a continuum of possible equilibria with higher-wage equilibria welfare dominating lower-wage equilibria. Assuming that no economic agent deviates from an existing strategy unless deviation is a unilateral best response, the model exhibits (1) ...
Working Paper
Demand Shocks, Hysteresis and Monetary Policy
This paper builds a micro-founded general equilibrium model of hysteresis in which changing composition of firms with heterogeneous qualities in response to demand shocks alter the total factor productivity of the economy through a process of "creative destruction". Hysteresis fundamentally challenges existing consensus on stabilization policies: the complete stabilization of demand shocks becomes suboptimal as demand creates its own supply; fiscal multiplier can be substantially larger than 1; an opportunistic monetary policymaker, who adopts a lenient policy reaction to positive demand ...