Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy

By D. Reifschneider, William L. Wascher, David W. Wilcox. IMF Economic Review, 2015

183 citations recorded by the source corpus.

The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts, we estimate that potential GDP in late 2014 was about 7 percent below the trajectory it appeared to be on prior to 2007. We argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand. Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations—such as increased risks of financial instability or inflation instability—could cause policymakers to exercise restraint in their response to cyclical weakness.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/4c94c98389dd1fec845741b70113b6a57d676e3d

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Citations in the corpus

Monetary Policy, the Financial Cycle and Ultralow Interest Rates (2016, background): “…cycle in driving economic fluctuations over the medium term, we share common ground with recent work that calls into question the standard presumption that cyclical fluctuations take place around a predetermined trend (Blanchard et al (2015), Martin et al (2015), Reifschneider et al (2015)).”
Long-Term Damage from the Great Recession in OECD Countries (2014, background): “Fernald (2012) estimates a loss of potential of 5 percent in 2011; Reifschneider et al. (2013) estimate 6 percent in the first quarter of 2013; and CBO (2014) predicts a loss of 7.3 percent in 2017.”
Tracking the Slowdown in Long-Run GDP Growth (2017, background): “It is interesting to compare the results of our decomposition exercise to similar approaches in the literature, in particular, Gordon (2010, 2014a) and Reifschneider et al. (2013).”
Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence (2019, unknown): “Reifschneider et al. (2015) emphasize not only this factor but also the sustained drop in productivity.”