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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 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 long run, the one-sector model falls short empirically, reflecting the importance of rapid technical 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 us 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

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-05.

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Date of creation: 2009
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Handle: RePEc:fip:fedfwp:2009-05

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Keywords: Input-output analysis ; Productivity ; Monetary policy;

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References

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Cited by:
  1. Sala, Luca & Söderström, Ulf & Trigari, Antonella, 2010. "The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours," Working Paper Series 246, Sveriges Riksbank (Central Bank of Sweden).
  2. Taylor, John B. & Wieland, Volker, 2010. "Surprising comparative properties of monetary models: Results from a new model database," Working Paper Series 1261, European Central Bank.
  3. 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.
  4. 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.

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