The OECD potential output estimation methodology

Thomas Chalaux and Yvan Guillemette

No 1563, OECD Economics Department Working Papers from OECD Publishing

Abstract: This paper describes the methodology used in the OECD Economics Department to produce historical estimates and short-run projections of potential output. These estimates are used mainly in the OECD Economic Outlook, in country surveys and as starting point for long-run scenarios. Total-economy potential output is modelled using a constant-returns-to-scale Cobb-Douglas production function with fixed factor shares. The three main inputs are labour, fixed capital excluding housing and labour efficiency, the latter obtained as a decomposition residual. The trend unemployment rate is estimated by Kalman filtering within a forward-looking Phillips curve. Other trend components are obtained by HP-filtering but labour efficiency and the labour force participation rate are cyclically adjusted before filtering to help alleviate the end-point problem associated with filters. This pre-filtering cyclical adjustment is especially helpful at cyclical turning points. It helps to lower the cyclicality of potential output as well as the extent of future revisions.

Keywords: capital stock; labour efficiency; NAIRU; output gap; potential growth; potential output (search for similar items in EconPapers)
JEL-codes: E20 E32 (search for similar items in EconPapers)
Date: 2019-08-05
New Economics Papers: this item is included in nep-ets and nep-mac
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:oec:ecoaaa:1563-en

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