Post-financial crisis recoveries tend to be slow and accompanied by slowdowns in total factor productivity (TFP) and permanent losses in GDP. To prevent them, how should monetary policy be conducted? We address this issue by developing a model with endogenous TFP growth in which an adverse financial shock can induce a slow recovery. In the model, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much larger than when TFP expands exogenously. Moreover, inflation stabilization results in a sizable welfare loss, while nominal GDP stabilization works well, albeit causing high interest rate volatility.
Ikeda, Daisuke, and Takushi Kurozumi.
"Slow Post-financial Crisis Recovery and Monetary Policy."
American Economic Journal: Macroeconomics,
General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
Business Fluctuations; Cycles
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy