The U.S. Expansion: Was It Demand- or Supply-led?

This paper analyses the nature of the US expansion. Can it be characterized as a demand- or supply-led boom? In answering this question, the paper also analyses the importance of the “new economy” in shaping economic developments in the US during the late 1990s and at the start of the new century. The analysis is based on the estimation of simple structural VAR models which can be rationalized by a class of New Keynesian models with sticky prices and monopolistic competition. By using data on the nonfarm business sector for the period 1972:1–2001:2, a decomposition of output, labour productivity and hours into technology (aggregate supply) and non-technology (aggregate demand) components is estimated and utilized when the nature of the expansion is analysed. The paper shows that during the recovery growth in real output in the nonfarm business sector was mainly demand-led until 1998. Thereafter the importance of technology shocks started to increase, and during the latter phase of the expansion the role of technology shocks was dominant. It was most apparent in 2000. On the other hand, aggregate demand shocks have had a strong dampening effect since the beginning of 2000. Rather than providing evidence of a “new economy”, the importance of technology shocks may only reflect very rapid – and supply-led – growth in the manufacture of electronic equipment with no spillover effects on the rest of the economy.