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What do we know and not know about potential output?

  • Susanto Basu
  • John G. Fernald

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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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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