Implications for the economy and monetary policy For concreteness, suppose that the pace of productivity gains in the latter part of 2005 and in 2006 proves disappointing, sufficiently so to suggest that current estimates of the sustainable rate of productivity growth may be overoptimistic. Let us first consider what this information would likely imply for the medium-term economic forecast.
To anticipate the conclusion, we will see that the strength of the response of aggregate demand to productivity developments is the key determinant of their overall impact.7 In the first instance, incoming evidence of a secular slowdown in productivity would likely result in slower growth in consumption spending, capital investment, and aggregate output relative to what would have been otherwise expected.