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Slow Post-financial Crisis Recovery and Monetary Policy

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  • Daisuke Ikeda
  • Takushi Kurozumi

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.

Suggested Citation

  • Daisuke Ikeda & Takushi Kurozumi, 2019. "Slow Post-financial Crisis Recovery and Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 82-112, October.
    • Handle: RePEc:aea:aejmac:v:11:y:2019:i:4:p:82-112
    Note: DOI: 10.1257/mac.20160048
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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