Consistent with the definition of a steady state, at the start of the simulations, the output gap is closed, the unemployment rate is equal to its natural rate of 4.8 percent, inflation is 2 percent, the nominal federal funds rate is 3 percent, the 10-year Treasury bond rate is 3.5 percent, and potential output growth is 2 percent.
But this is not the full story. Positive demand shocks – related to the strong pick-up in demand following the relaxation of COVID-19 restrictions – have also been at play. To me, two main types of evidence point to an important role that demand shocks have played so far. First, for some time now, inflationary pressures have been increasingly broad-based.