A NEW MEASURE OF US POTENTIAL OUTPUT, INFLATION FORECASTS, AND MONETARY POLICY RULES*

Charles Harvie and Hyeon-seung Huh

Manchester School, 2009, vol. 77, issue 5, 611-631

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.

Date: 2009
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https://doi.org/10.1111/j.1467-9957.2009.02114.x

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