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Methodological Issues of Medium-Term Macroeconomic Projections - The Case of Potential Output

  • Gustav Horn

    ()

    (IMK at the Hans Boeckler Foundation)

  • Camille Logeay

    ()

    (IMK at the Hans Boeckler Foundation)

  • Silke Tober

    ()

    (IMK at the Hans Boeckler Foundation)

Potential output measures a country's attainable aggregate living standard and is thus one of the most important categories of economics. It is also a key indicator for monetary and fiscal policy. Despite its prominence, however, potential output is a difficult concept to pinpoint theoretically and even more so empirically. The study discusses these difficulties and also the marked revision of potential output estimates by major international organisations. The authors furthermore present the results of their attempts to quantify Germany's potential output based on a production function approach coupled with the Kalman-filter technique to estimate the NAIRU. The authors find that potential output and potential output growth greatly depend on how the NAIRU and potential total factor productivity are modelled. Given the difficulties involved in robustly estimating potential output, especially in real time, economic policy makers need to learn to pursue their policy objectives without reference to this variable.

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File URL: http://www.boeckler.de/pdf/p_imk_studies_04_2007.pdf
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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Studies with number 04-2007.

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Length: 155 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:imk:studie:04-2007
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