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What do we know (and not know) about potential output?

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  • Susanto Basu
  • John G. Fernald

Abstract

Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and they often assume that potential output is a smooth series in the short run -- approximated by a medium- or long-run estimate. But in both the short and the long run, the one-sector model falls short empirically, reflecting the importance of rapid technological change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows the authors to discuss a range of other issues that are less well understood and where further research could be valuable.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2009)
Issue (Month): Jul ()
Pages: 187-214

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Handle: RePEc:fip:fedlrv:y:2009:i:jul:p:187-214:n:v.91no.4

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Keywords: Economic development ; Economic conditions;

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References

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Cited by:
  1. Karan Singh, B & Kanakaraj, A & Sridevi, T.O, 2010. "Revisiting the empirical existence of the Phillips Curve for India," MPRA Paper 31793, University Library of Munich, Germany.
  2. John B. Taylor & Volker Wieland, 2012. "Surprising Comparative Properties of Monetary Models: Results from a New Model Database," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 800-816, August.
  3. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.
  4. Sala, Luca & Söderström, Ulf & Trigari, Antonella, 2010. "The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours," CEPR Discussion Papers 8005, C.E.P.R. Discussion Papers.

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