In the period from 1996 to 2005, most of the real GDP growth gap (about 80%) between the United States and the euro area could be attributed to differences in labour productivity growth (measured by real GDP per hour worked), the remaining gap (about 20%) being explained by the joint effect of population growth and the rate of change in the degree of labour utilisation. Labour utilisation, that is, the extent to which labour potentially available in the economy is effectively utilised, can be defined as hours worked per head of total population. This is the second important determinant of economic growth. It can be expressed as the sum of four components: average hours worked per employed person, the unemployment rate, the labour force participation rate and the share of the working age population in the total population. Let us look at these components one by one. The contribution to growth of the participation rate and hours worked has been much lower in the more recent past than in the 1960s and 1970s. The lower level of the participation rate and significant  1  The decline in euro area productivity growth is manifest irrespective of the measure of labour input used. In Europe, however, productivity growth has generally been higher when it is measured per hour worked rather than by per person employed. Productivity comparisons across countries face various statistical or methodological problems. Nevertheless, it appears that productivity growth developments in the euro area and the United States are largely independent of the concepts used.

Simultaneously, the Fed tried – and I emphasize tried because the message seems to have been garbled in the minds of some intended recipients – to influence expectations of its own behavior once asset purchases have run their course. These “asset-purchase” and “forward-guidance” policies are relatively unfamiliar, and their impact is uncertain. 6  See “Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath,” by David Luttrell, Tyler Atkinson and Harvey Rosenblum, Federal Reserve Bank of Dallas Economic Letter, vol. 8, no. 7, 2013, www.dallasfed.org/research/eclett/2013/el1307.cfm. 4  BIS central bankers’ speeches  One implication is that aggregate fiscal shocks – and, hence, also aggregate fiscal uncertainties – are likely to have outsize effects in current circumstances. Contractionary fiscal policy that would ordinarily drive down interest rates, providing offsetting stimulus to private expenditure, will have a larger-than-typical economic impact because this “crowding in” is absent once interest rates are confined to the zero lower bound. Expansionary fiscal policy, similarly, will fail to “crowd out” private expenditure if interest rates hold steady. Second, because the zero bound complicates the conduct of monetary policy and shortcircuits fiscal crowding out, it introduces a “kink,” or discontinuity, in the economy’s behavior. The existence of a kink means that uncertainty matters even if ordinarily it would not: “Certainty equivalence” no longer applies. When real growth and/or inflation prospects are weak – so that the economy is operating near the zero bound – downside risks to growth and inflation loom larger than they ordinarily would.