The full-speed economy: Does running a hotter economy benefit workers?

Managing the macroeconomy to achieve strong growth and low inflation is a careful balancing act. 

Overly restrictive macroeconomic policy – such as too-high central bank interest rates – stifles growth, but policy that is too loose risks ‘overheating’ the economy and triggering high inflation. 

However, over the last two decades an interesting phenomenon occurred: countries that ran their economies slightly ‘hotter’ than was previously thought possible registered surprisingly positive effects.

Our review suggests that policymakers might be able to run the economy slightly hotter than previously thought – if the starting point is close-to-target inflation. A slightly hot economy could also boost future growth. In other words, running the economy at ‘full speed’ could generate momentum that subsequently helps to sustain future growth. It could also bring benefits for lower earners without causing above-target inflation.