Not a great time for a supply-side experiment

Research evidence excerpt

Not a great time for a supply-side experiment

bank paths rate No

decisions rely on estimates of three unobservable rates — the "Key Risks" in Statement

economy’s utilization rate, its potential growth rate, and its on Monetary Policy: Detailed qualitative Symmetric

neutral policy rate — that are notoriously difficult to tie Reserve Bank of qualitative & quantitative description of key forecast-error

Australia risk discussion risks based charts

down. This supply-side uncertainty has been unusually ele- Reserve Bank of

vated throughout a post-COVID expansion buffeted by multi- New Zealand Extensive use No

ple shocks. DM measures of output gaps and labor market Source: Bauer, Michael, Travis Berge, Giuseppe Fiori, Francesca Loria, and Molin

slack have diverged sharply, and this divergence has been Zhong (2025), “Accounting for Uncertainty and Risks in Monetary Policy,” J.P. Morgan

accompanied by large shifts in the Phillips curve relating

He and others highlight the mid-1990s experience — inslack and inflation. Speed limit assessments have been diffi-

which Fed chair Alan Greenspan restrained the Fed fromcult due to volatility in labor force and productivity gains. A

tightening based on a mix of anecdotal and alternative signalslack of clarity on supply-side performance has also increased

that productivity growth was being underestimated — as anuncertainty around r* estimates.

argument for adopting a more optimistic supply-side view.

The FOMC maintained lower rates than a real-time Taylor

Faced with elevated supply-side uncertainty, central banks

rule projected over 1996-1999 and this experiment did not

have tended to place less weight on their estimates of these

result in a material uptick in inflation. Subsequent revisions