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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 be accompanied by slowdowns in 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, 2018. "Slow Post-Financial Crisis Recovery and Monetary Policy," Globalization Institute Working Papers 347, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:347
    DOI: 10.24149/gwp347
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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