Might the “overheating theory” be right?

The “overheating theory” suggests that the policy mix should be kept highly expansionary as the economy returns to full employment. This is expected to have beneficial effects: The return to normal of core inflation after a period of deflation; An increase in the participation rate, as companies need to continue to increase their employment; An increase in productivity gains, which is the only way to produce more at full employment. The United States and the euro zone excluding Germany are now close to applying this overheating theory. Can this be expected to lead to the above beneficial effects? The case of Japan, where this theory has clearly been applied over many years, shows that overheating can probably be expected to drive up the participation rate.