Multivariate Filter Estimation of Potential Output for the United States: An Extension with Labor Market Hysteresis

Ali Alichi, Hayk Avetisyan, Douglas Laxton, Shalva Mkhatrishvili, Armen Nurbekyan, Lusine Torosyan, Hou Wang, Armen Nurbekyan () and Lusine Torosyan
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Armen Nurbekyan: Economic Research Department, Central Bank of Armenia

No 9, Working Papers from Central Bank of Armenia

Abstract: This paper extends the multivariate filter approach of estimating potential output developed by Alichi and others (2018) to incorporate labor market hysteresis. This extension captures the idea that long and deep recessions (expansions) cause persistent damage (improvement) to the labor market, thereby reducing (increasing) potential output. Applying the model to U.S. data results in significantly smaller estimates of output gaps, and higher estimates of the NAIRU, after the global financial crisis, compared to estimates without hysteresis. The smaller output gaps partly explain the absence of persistent deflation despite the slow recovery during 2010-2017. Going forward, if strong growth performance continues well beyond 2018, hysteresis is expected to result in a structural improvement in growth and employment.

Keywords: Macroeconomic Modeling; Potential Output (search for similar items in EconPapers)
JEL-codes: C51 E31 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-02, Revised 2019-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as an IMF Working Paper, February 2019, pages 1-35

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https://www.imf.org/en/Publications/WP/Issues/2019 ... Extension-with-46586 First version, 2019 (application/pdf)
https://www.cba.am/EN/panalyticalmaterialsresearches/Analytical_26.08.2019.pdf Revised version, 2019 (application/pdf)

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Working Paper: Multivariate Filter Estimation of Potential Output for the United States: An Extension with Labor Market Hysteresis (2019)
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