We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon we term output hysteresis. In the model, the incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing...

Many argue that, in the presence of a lower bound on nominal interest rates, central banks should use a risk management approach for setting policy, which implies commit- ting to a more expansionary policy to deal with uncertainty about the economic recovery. Using a standard model for monetary...

Analyses a New Keynesian model linearised around a possibly positive trend inflation rate. The trend inflation, i.e. target inflation rate, is brought about either by a forward-looking or contemporaneous Taylor rule. Technical analysis of model behaviour and steady-state under the assumption of...