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The productivity gap: Monetary policy, the subprime boom, and the post-2001 productivity surge

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  • Selgin, George
  • Beckworth, David
  • Bahadir, Berrak

Abstract

It is widely believed that, in the wake of the dot.com crash, the Fed kept the federal funds target rate too low for too long, inadvertently contributing to the subprime boom. We attribute this and other Fed departures from a “neutral” policy stance to the Fed's failure to respond appropriately to exceptional rates of total factor productivity growth. We then show how the Fed, by adhering to a nominal GDP growth rate target, might have succeeded in maintaining such a neutral stance.

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  • Selgin, George & Beckworth, David & Bahadir, Berrak, 2015. "The productivity gap: Monetary policy, the subprime boom, and the post-2001 productivity surge," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 189-207.
    • Handle: RePEc:eee:jpolmo:v:37:y:2015:i:2:p:189-207
    DOI: 10.1016/j.jpolmod.2015.02.005
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    Cited by:

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    2. Bryan P. Cutsinger & William J. Luther, 2025. "Symposium introduction: Reviewing the Federal Reserve's framework," Southern Economic Journal, John Wiley & Sons, vol. 91(4), pages 1213-1228, April.
    3. Antonio Ribba, 2017. "What Drives US Inflation and Unemployment in the Long Run?," Economics Bulletin, AccessEcon, vol. 37(2), pages 765-777.
    4. David Beckworth & Joshua R. Hendrickson, 2020. "Nominal GDP Targeting and the Taylor Rule on an Even Playing Field," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(1), pages 269-286, February.
    5. Chao Liang & Yanran Hong & Luu Duc Toan Huynh & Feng Ma, 2023. "Asymmetric dynamic risk transmission between financial stress and monetary policy uncertainty: thinking in the post-covid-19 world," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1543-1567, May.
    6. Nicolás Cachanosky & Alexander W. Salter, 2017. "The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 169-192, June.
    7. van Riet Ad, 2019. "Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?," Review of Economics, De Gruyter, vol. 70(2), pages 99-135, August.
    8. Hendrickson, Joshua R., 2022. "Commodity money, free banking, and nominal income targeting: Lessons for monetary policy reform," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 462-477.
    9. Nicolás Cachanosky & Alexander W. Salter, 2020. "The super-alertness of central banks," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 33(1), pages 187-200, March.
    10. Cendejas Bueno, José Luis & Castañeda, Juan Enrique & Muñoz, Félix, 2015. "Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability," Working Papers in Economic Theory 2015/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    11. David Beckworth, 2017. "The monetary policy origins of the eurozone crisis," International Finance, Wiley Blackwell, vol. 20(2), pages 114-134, June.
    12. John B. Taylor, 2016. "Rethinking the International Monetary System," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 239-250, Spring/Su.
    13. Cachanosky, Nicolás & Lewin, Peter, 2016. "An empirical application of the EVA® framework to business cycles," Review of Financial Economics, Elsevier, vol. 30(C), pages 60-67.
    14. Beckworth, David & Horan, Patrick J., 2024. "A two-for-one deal: Targeting nominal GDP to create a supply-shock robust inflation target," Journal of Policy Modeling, Elsevier, vol. 46(6), pages 1071-1089.
    15. Nicolás Cachanosky, 2021. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 279-288, June.
    16. Nicolás Cachanosky, 0. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 0, pages 1-10.
    17. William J. Luther & Mark Cohen, 2016. "On the Empirical Relevance of the Mises–Hayek Theory of the Trade Cycle," Advances in Austrian Economics, in: Studies in Austrian Macroeconomics, volume 20, pages 79-103, Emerald Group Publishing Limited.
    18. Joshua R Hendrickson, 2015. "Should the government increase investment in infrastructure improvements when interest rates decline?," Economics Bulletin, AccessEcon, vol. 35(3), pages 1687-1692.
    19. George Selgin, 2014. "Operation Twist-the-Truth: How the Federal Reserve Misrepresents Its History and Performance," Cato Journal, Cato Journal, Cato Institute, vol. 34(2), pages 229-263, Spring/Su.

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    More about this item

    Keywords

    Productivity; Neutral interest rate; Output gap; Business cycle;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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