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A New Measure Of Us Potential Output, Inflation Forecasts, And Monetary Policy Rules

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  • CHARLES HARVIE
  • HYEON-SEUNG HUH

Abstract

This paper proposes a new measure of potential output for the USA. The key idea is that potential output is constructed as the level of output which would correspond to a forecast of no inflation change over the policy horizon. The resultant output gap has a clear interpretation as a measure to gauge future inflationary pressures. It also exhibits better predictability for future inflation changes in comparison with previous output gap measures. Simulation results further demonstrate its usefulness as a feedback variable in the Taylor monetary policy rule for interest rates. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

Suggested Citation

  • Charles Harvie & Hyeon-Seung Huh, 2009. "A New Measure Of Us Potential Output, Inflation Forecasts, And Monetary Policy Rules," Manchester School, University of Manchester, vol. 77(5), pages 611-631, September.
  • Handle: RePEc:bla:manchs:v:77:y:2009:i:5:p:611-631
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