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We do, that's what monetary policy is for (and fiscal stimulus, when warranted). The purpose is to target aggregate demand in an attempt to shift GDP towards it
by AngrySkillzz 11y ago
We do, that's what monetary policy is for (and fiscal stimulus, when warranted). The purpose is to target aggregate demand in an attempt to shift GDP towards its estimated potential. But that doesn't mean that the pre-recession level of output is sustainable, and that it corresponds to the demand level we should be targeting.
As an example, with housing prices so high there was a surge in homebuilding. No one really needed or wanted all those homes, so the demand for ex. shingles was artificially high. It would make no sense to introduce some kind of stimulus program to prop up the shingle market to its housing bubble peak. Nobody needs or wants that many shingles at that price.
The issue I take with the article is that their study compares growth levels during recovery to growth levels right before a market crash. It's not sensible; of course the latter will be higher, that's how market psychology works. It doesn't make sense to think of "potential growth" as "the highest growth we've seen."