I said in my last post that transitional growth is slow, and therefore changing potential GDP – as many of the recent Cato Growth proposals would do – could not add much to the growth rate of GDP in the near term.
There were several questions that came up in the comments, so let me try to be more clear about distinguishing between influences of trend growth and short-run shocks. Output in period $latex {t+1}&fg=000000$ is
$latex displaystyle y_{t+1} = (1+g)y_t + (1+g)lambda (y^{ast}_t – y_t) (1)&fg=000000$
where the first term on the right is the normal trend growth rate, and the second term is the additional transitional growth that occurs because the economy is not at potential GDP, $latex {y^{ast}_t}&fg=000000$.
We need to distinguish between changes in potential GDP and changes in current GDP. Let’s take the above equation, plug in $latex {lambda=0.02}&fg=000000$, and then use it to iterate…
View original post 1,142 more words
Utopia, you are standing in it! 
Recent Comments