RESEARCH

RESEARCH PAPERS IN PROGRESS

1. Contribution of Financial and Labor Market Frictions to Hysteresis Theory

Abstract: This article investigates the ability of new Keynesian models to be consistent with the two main features of the business cycle after the Great Recession—amplification and persistence of the effects of adverse shocks. These features, known as hysteresis effects, describe the slow pace of recovery of production and employment. Thus, the article shows that the new Keynesian featuring the interaction between financial frictions and the labor market segmentation between insiders and outsiders provides one of the best characterizations of hysteresis effects. I modeled financial frictions by an agency problem between intermediaries and depositors. Insiders' power is set to capture labor frictions. Compared to the models with only financial frictions, the effects of adverse shocks last at least 5 years further and are two-fold more important.

2. Unconventional Monetary Policy in a Hysteresis Model with Financial and Labor Market Frictions

Abstract: Following the recent financial crisis, most countries have faced hysteresis effects that have slowed the pace of their recovery, even though they have used unconventional monetary policies intended to stabilize their economic fluctuation. Thus, this paper develops a new Keynesian model to examine the scope of these monetary policies on hysteresis effects. Unconventional monetary policy is designed like the credit easing through which the central bank lends directly to the economy. I calibrated the model on the U.S. economy and I find that credit easing plays an important role in economic stabilization when there are hysteresis effects. It helps to speed up the rhythm of economic recovery. With credit easing, hysteresis effects on production last 2 years and a half instead of 5 years, and those of unemployment 3 years rather than 6 years. Besides, credit easing tends to improve welfare by 3.55\% to 4.30\%.

3. Missing Disinflation and Human Capital Depreciation ( join work with Jean-François Rouillard)

Abstract: In accordance with new Keynesian predictions and historical trajectories followed by inflation during past crises, the context of the Great Recession should have led to a sharp decline in inflation or even deflation. On the contrary, inflation has remained relatively stable, leading to the paradox of missing disinflation. This paper explains this paradox by putting forward a variant of the new Keynesian model that combines nominal rigidities and human capital depreciation ingredients. We calibrate it on the U.S. economy and find that in response to adverse preferences and monetary shocks of the same size, the disinflation is cut down by a factor of 3 to 4 compared to the new Keynesian models without the human capital depreciation mechanism. Our simulations show that when long-term unemployment is rising, more people are likely to lose their skills, resulting in workers with low human capital becoming more dominant. This tends to weaken labor market competitiveness and the intensity with which these unemployed people prospect new jobs. As a result, wages do not strongly fall, and prices of goods remain relatively stable.

4. Hysteresis Effects and Exchange rate, joint work with Professeur Gabriel P. Mathy, American University (Abstract coming)

We are currently working on this project. We suspect that the exchange rate could be one of the hysteresis mechanisms of the labour market. According to our intuition, the fixed exchange rate regimes would likely favour the persistence of unemployment contrary to the flexible exchange rate. This is a difference that could explain why unemployment tends to be high in the euro-zone and smaller in the United States. Our purpose is to build a model to check the plausibility of this idea. By doing this, we will contribute to the literature by identifying a new channel of hysteresis effects.

5. Do Hysteresis mechanisms Favour Demand or Supply Sshocks? joint work Professor Jean François Rouillard, Université de Sherbrooke (Abstract coming)

In this project, we want to estimate by Bayesian methods the model of my research project on hysteresis mechanisms and physical capital. Based on our knowledge, no study on hysteresis has already estimated these kinds of models by using these methods. The purpose of this project is to have a better understanding of hysteresis mechanisms in New-Keynesian models. We also want to identify the sources (shocks) of business cycles in the model where hysteresis mechanisms play an important role.