Comparing measures of potential output

One of the goals of stabilization policy is to reduce the output gap—the difference between potential and actual output—during downturns. Potential output, however, is an unobserved variable whose definition can vary. For example, some view potential output as the level of output that can be produced when employment is at the natural rate. Others use trend measures of output to measure potential. We survey some of these measures using both full-sample data (all of the data that would be available through June 2017) and real-time data (the actual data that would have been available at different points in the sample). We construct six different measures of potential: a linear trend, a quadratic trend, the Congressional Budget Office measure, and three filtered trends. We compare these measures across methods and across time. We also use the measures to compute the monetary policy prescription in a standard interest rate rule and find very little difference across methods.

Title	Comparing measures of potential output
Creator	Shell, H. G.
	Guisinger, Amy Y.
	Owyang, M. T.
Publisher	Federal Reserve Bank of St. Louis Review
Academic Department	Economics
Division	Social Sciences
Organization	Lafayette College
Date Issued	2018
Date Available	2019-05-06T14:32:42Z
Type	Article
Language	English
Bibliographic Citation	Guisinger, A. Y., M. T. Owyang, and H. G. Shell (2018) "Comparing measures of potential output" Federal Reserve Bank of St. Louis Review, Fourth Quarter: 297-316.
Standard Identifier	DOI 10.20955/r.100.297-316
Standard Identifier	Handle 10385/2863
Permalink	http://hdl.handle.net/10385/2863
Rights Statement	In Copyright
Rights Holders	Federal Reserve Bank of St. Louis