Learning and Shifts in Trend Growth

Rochelle M. Edge and Thomas Laubach

No 97, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: Shifts in the underlying growth rate of productivity, such as occurred in the 1970s and the 1990s, are relatively rare and difficult to identify in real time. In this paper, we document that economists' projections of trend productivity growth adjust gradually to shifts in trend growth. We find that long-run expectations of growth are well described by a simple updating rule based on an estimated Kalman filter model. We then examine the effects of shifts in trend productivity growth in an optimization-based growth model. If immediately recognized, an increase in the trend growth causes long-term interest rates to rise and a sharp decline in employment and investment. In contrast, with gradual learning, a productivity acceleration sets off a sustained employment and investment boom and a gradual rise in long-term interest rates, a pattern consistent with the experience of the 1990s

Keywords: Kalman filter; real-time data; productivity; signal extraction (search for similar items in EconPapers)
JEL-codes: D83 E20 E32 (search for similar items in EconPapers)
Date: 2004

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Persistent link: http://EconPapers.repec.org/RePEc:red:sed004:97

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