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Issues on potential growth measurement and comparison: how structural is the production function approach?

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  • Christophe Cahn
  • Arthur Saint-Guilhem

Abstract

This article aims to better understand the factors driving fluctuations in potential output measured by the production function approach (PFA.) To do so, the authors integrate a production function definition of potential output into a large-scale dynamic stochastic general equilibrium (DSGE) model in a fully consistent manner and give two estimated versions based on U.S. and euro-area data. The main contribution of this article is to provide a quantitative and comparative assessment of two approaches to potential output measurement, namely DSGE and PFA, in an integrated framework. The authors find that medium-term fluctuations in potential output measured by the PFA are likely to result from a large variety of shocks, real or nominal. These results suggest that international comparisons of potential growth using the PFA could lead to overstating the role of structural factors in explaining cross-country differences in potential output, while neglecting the fact that different economies are exposed to different shocks over time.

Suggested Citation

  • Christophe Cahn & Arthur Saint-Guilhem, 2009. "Issues on potential growth measurement and comparison: how structural is the production function approach?," Review, Federal Reserve Bank of St. Louis, vol. 91(Jul), pages 221-240.
  • Handle: RePEc:fip:fedlrv:y:2009:i:jul:p:221-240:n:v.91no.4
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    2. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    3. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    4. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    2. Mateusz Machaj, 2016. "Can the Taylor Rule be a Good Guidance for Policy? The Case of 2001-2008 Real Estate Bubble," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(4), pages 381-395.

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