The Slowdown in US Productivity Growth: Breaks and Beliefs

We use a business cycle model to explore the timing and size of breaks in long-run equilibrium total factor productivity growth in the United States. We find that steady-state productivity growth halved over the past 50 years, with the decrease most likely to have occurred in the early 1970s. The decline in productivity growth was hard to detect in real time – the behaviour of households and firms indicates that their beliefs about steady-state productivity growth did not adjust until the early-to-mid 2000s. As well as reducing growth in output, slower productivity growth has lowered the neutral real interest rate in the United States and made it harder for monetary policy to combat recessions. Had productivity growth not slowed, the federal funds rate may not have hit the zero lower bound until late 2010.