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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Slow Post-Financial Crisis Recovery and Monetary Policy
Daisuke Ikeda
Takushi Kurozumi

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.

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Daisuke Ikeda & Takushi Kurozumi, Slow Post-Financial Crisis Recovery and Monetary Policy, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 347, 01 Oct 2018.
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DOI: 10.24149/gwp347
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