Countercyclical policies may worsen economic fluctuations and reduce welfare.
The article explores how certain economic policies meant to stabilize the economy may actually end up causing the fluctuations they are trying to prevent. By analyzing how monetary policies affect price rigidity, the researchers found that countercyclical policies can make prices less flexible, leading to unintended consequences. In some cases, these policies may even reduce overall welfare. The study suggests that the best approach may involve committing to enhancing shocks rather than trying to smooth them out.