11-27-2016, 10:20 AM
We should also consider the possibility that weak demand has played a role in holding back productivity growth, although standard economic textbooks generally trace a path from productivity growth to demand rather than vice versa. Chair Yellen recently spoke on the influence of demand on aggregate supply.3 In her speech, she reviewed a body of literature that suggests that demand conditions can have persistent effects on supply.4 In most of the literature, these effects are thought to occur through hysteresis in labor markets. But there are likely also some channels through which low aggregate demand could affect productivity, perhaps by lowering research-and-development spending or decreasing the pace of firm formation and innovation. I believe that the relationship between productivity growth and the strength of aggregate demand is an area where further research is required.
FRB: Speech--Fischer, Longer-Term Challenges for the U.S. Economy--November 21, 2016