Department of Economics
530 Evans Hall #3880
University of California, Berkeley
Berkeley, CA 94720-3880
NBER Working Papers and Publications
|July 2017||The Cyclical Sensitivity in Estimates of Potential Output|
with Olivier Coibion, Yuriy Gorodnichenko: w23580
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. This approach points toward a more limited decline in potential out...