Trend Growth in the US

money.jpg Not long ago I talked about this in relation with a speak by Bernanke in which the chairman highlighted the declining labour force participation rate (LFPR) and how this would lower the US trend growth or potential growth rate. This is of course all very interesting from theoretical point of view in the sense that we need to determine the factors which decide trend growth (basically productivity and the number of workers (LFPR)) but crucially also the specific weight of these components and how they impact the economy in a given concrete context. In terms of policy issues the determination of the accurate trend growth rate is obviously of great importance for the central bank and its interest rate setting policy and more specifically its usage of growth and inflation targets.

Over at Economist's Views Mark Thoma features a well written piece from the WSJ (walled for non-subscribers) on the choices faced by the Fed in determining the potential output growth rate in the US.  

(From the WSJ)

Today, Fed officials are relieved that the economy has been slower than what is sometimes called "trend" or "potential." They wanted slower growth to avoid an outbreak of inflation. But a big question is what speed limit the Fed should anticipate for the rest of this decade. Lately, Fed officials have been speculating that the safe growth rate for the U.S. economy in the future may be slightly slower than the 3% annual growth rate of the past five years. 

It is easy to cast this as an academic, number-clogged debate. In fact, it is an instance where what the Fed thinks matters to all of us, not just bond traders. The Fed's estimate for trend growth determines whether officials will let the economy expand at, say, 3% on average, or just 2.75%. The difference sounds small, but adds up over time. An extra one-quarter percentage point in annual growth would mean $130 billion more goods and services for Americans to share by 2026.

An economy's speed limit is largely defined by two factors: how rapidly the number of workers increases and their "productivity," or how much each of them produces.

In the end, Mark's post is a good introductory read to the issues relating to the determination of trend growth and how it affects central bank policy making.

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