The Productivity Gap: Monetary Policy, the Subprime Boom, and the Post-2001 Productivity Surge
23 Pages Posted: 1 Dec 2011 Last revised: 26 Feb 2015
Date Written: February 25, 2015
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.
Keywords: Productivity, neutral interest rate, output gap, business cycle, Taylor Rule, subprime boom
JEL Classification: E32, E44, F34, F41
Suggested Citation: Suggested Citation