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The Cyclical Sensitivity in Estimates of Potential Output

Author

Listed:
  • Olivier Coibion

    (University of Texas at Austin)

  • Yuriy Gorodnichenko

    (University of California, Berkeley)

  • Mauricio Ulate

    (University of California, Berkeley)

Abstract

The fact that most of the persistent declines in output since the Great Recession have parlayed into equivalent declines in measures of potential output is commonly interpreted as implying that output will not return to previous trends. Using a variety of estimates of potential output for the U.S. and other countries, we show that these estimates respond gradually not only to supply-side shocks but also respond to demand shocks that have only transitory effects on output. Observing a revision in measures of potential output therefore says little about whether concurrent changes in actual output are likely to be permanent or not. In contrast, some structural VAR methodologies can avoid these shortcomings, even in real-time. These approaches point toward a more limited decline in potential output following the Great Recession.
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  • Olivier Coibion & Yuriy Gorodnichenko & Mauricio Ulate, 2018. "The Cyclical Sensitivity in Estimates of Potential Output," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 343-441.
    • Handle: RePEc:bin:bpeajo:v:49:y:2018:i:2018-02:p:343-441
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    More about this item

    Keywords

    Great Recession; output; shocks; trends; monetary policy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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