Alternative scenarios assess possibility of wrong productivity growth estimates.  In two key alternative scenarios, the IMF accounts for the possibility that private sector assessments of the underlying productivity growth in the United States may have been skewed.  The argument goes that if the past long-term productivity trend is overestimated; a significant drop in activity will follow, once the inaccuracy is realized, to correct for the excesses in technology spending associated with earlier exuberance.  The first scenario assumes that future U.S. total factor productivity growth is actually half a percentage point higher than in the baseline scenario.  As a result, the improvement in future expectations of profits and wages will raise investment and consumption.  The increase in domestic demand and output, are accompanied by steady upward pressure on the US$ and the stock market, which will be only partly offset by tighter monetary policy to address the emergence of inflationary pressures.  The second IMF scenario assumes that since 1996 the underlying U.S. total factor productivity has actually been growing at 0.25 percentage points lower than in the WEO baseline economic forecast and that productivity growth from 2002 onwards will be 0.5 percentage points lower than in the baseline forecast for the rest of the advanced economies.  The resulting overhang in investment.  will prompt firms to adjust to the desired capital output ratio, which would trigger a steep drop in domestic demand and associated declines in equity markets and the value of the US$.  In the Euro Area, real domestic demand would rise above the baseline scenario, since the exchange rate appreciation and lower inflation would enable monetary authorities to lower short-term interest rates, thus boosting investment and consumption.  In Japan, on the other hand domestic demand would drop, since monetary authorities lack additional room for monetary easing.  In developing countries, domestic demand would drop off owing to net lower demand in the advanced economies. 

Table 3: Alternative Scenarios

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Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing for Latin America.  For more details please click here.

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