Slow Post-financial Crisis Recovery and Monetary Policy
American Economic Journal: Macroeconomics
vol. 11,
no. 4, October 2019
(pp. 82-112)
Abstract
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.Citation
Ikeda, Daisuke, and Takushi Kurozumi. 2019. "Slow Post-financial Crisis Recovery and Monetary Policy." American Economic Journal: Macroeconomics, 11 (4): 82-112. DOI: 10.1257/mac.20160048Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G01 Financial Crises
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