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However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods.
Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies.
When products disappear from the market with no substitutes from the same manufacturer, they may have been replaced by cheaper or better products from a different manufacturer.
Official measurements typically approximate price changes from such creative destruction using price changes for products that were not replaced.
This has the potential to limit the scope for central banks to respond to future recessionary shocks.
After eight years of economic recovery, inflation remains below the FOMC’s target.The Federal Reserve is moving towards more normal monetary policy, which means rising interest rates.But factors including the real natural rate of interest, a slower sustainable pace of growth, and inflation all point to a new normal where interest rates are lower than in the 1990s and early 2000s.However, using city-level data over the past 25 years shows that the cross-city relationship has weakened since the Great Recession.Explanations consistent with this timing suggest that the Phillips curve may return to a steeper curve in the future.