Post-Crisis Slow Recovery and Monetary Policy

Daisuke Ikeda and Takushi Kurozumi

No 14-E-16, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.

Keywords: Financial shock; Endogenous TFP growth; Slow recovery; Monetary policy; Welfare cost of business cycle (search for similar items in EconPapers)
JEL-codes: E52 O33 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Slow Post-financial Crisis Recovery and Monetary Policy (2019)
Working Paper: Slow Post-Financial Crisis Recovery and Monetary Policy (2018)
Working Paper: Post-Crisis Slow Recovery and Monetary Policy (2014)
Working Paper: Post-Crisis Slow Recovery and Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:14-e-16

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