Bernanke covers practically every topic covered in my summer Macroeconomics class. Great summary discussion! Thanks Vic Chia for the pointer.
Estimates of potential output growth (y*) have declined primarily for two reasons. First, potential growth depends importantly on the pace of growth of productivity (output per hour). Unfortunately, productivity growth has repeatedly disappointed expectations during this recovery. For example, in 2009, leading scholars were predicting productivity growth in the coming years of about 2 percent per annum; in fact, growth in output per hour worked has recently been closer to half a percent per year. It’s possible that productivity may recover, of course, but if it doesn’t, then potential growth rates in the future will be lower than had been expected earlier.Second, although Fed forecasters have been too optimistic about output growth in recent years, they have also been, interestingly, too pessimistic about unemployment, which has fallen faster than expected despite the slow rise in GDP.