01873cas a2200241 a 4500 AALejournalIMF015898 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513512532 1018-5941 BD-DhAAL BD-DhAAL Bakker, Bas. What Happens if Central Banks Misdiagnose a Slowdown in Potential Output / Bas Bakker. Washington, D.C. : International Monetary Fund, 2019. 1 online resource (41 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2019/208 Full text available on IMF http://elibrary.imf.org/view/journals/001/2019/208/001.2019.issue-208-en.xml IMF e-Library