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Economic Perspectives, Vol. 29, No. 1, February 2005
Is there evidence of the new economy in U.S. GDP data?
Economic theory suggests that temporary cyclical fluctuations in real gross domestic product (GDP) adversely affect the economic well-being of households. For example, when the economy experiences a cyclical downturn, companies lay off workers with resulting negative consequences for the workers and their families. Thus, it is not surprising that cyclical fluctuations in GDP receive a lot of attention from policymakers. Indeed, there is considerable empirical research that shows that cyclical fluctuations in GDP play an important role in the practical conduct of U.S. monetary policy.1 In general, the U.S. Federal Reserve (Fed) tightens monetary policy (increases interest rates) when the cyclical component of GDP rises and loosens monetary policy (reduces rates) when the cyclical component of GDP falls.
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