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Chicago Fed Letter, No. 134, October 1998
A New Paradigm for the U.S. Economy?

It is virtually impossible these days to avoid articles in the popular press that hail the dawn of a new paradigm in which the old truths about the U.S. economy no longer hold. These stories are fueled by a robust economic expansion that seems to have no end in sight. At the core of the new paradigm is the belief that the U.S. has experienced a structural change that has raised its trend growth rate, so that the economy can now expand at rates much greater than in the past without igniting higher levels of price inflation. Many economists have argued against the new paradigm by pointing to temporary or cyclical events that have a favorable impact, but have not altered the trend growth rate of U.S. output. At the heart of this debate is the age old problem of decomposing movements in output into trend and cyclical components. This Chicago Fed Letter reviews economists’ long-established ways of extracting the trend and cyclical components from economic time series and applies some newer techniques to recent movements in U.S. output.

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