The Cyclical Sensitivity in Estimates of Potential Output

Olivier Coibion, Yuriy Gorodnichenko and Mauricio Ulate

No 23580, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E2 E3 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (69)

Published as Olivier Coibion & Yuriy Gorodnichenko & Mauricio Ulate, 2018. "The Cyclical Sensitivity in Estimates of Potential Output," Brookings Papers on Economic Activity, vol 2018(2), pages 343-441.

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Journal Article: The Cyclical Sensitivity in Estimates of Potential Output (2018)
Working Paper: The Cyclical Sensitivity in Estimates of Potential Output (2018)
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