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The challenges of estimating potential output in real time

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  • Robert W. Arnold

Abstract

Potential output is an estimate of the level of gross domestic product attainable when the economy is operating at a high rate of resource use. A summary measure of the economy's productive capacity, potential output plays an important role in the Congressional Budget Office (CBO)'s economic forecast and projection. The author briefly describes the method the CBO uses to estimate and project potential output, outlines some of the advantages and disadvantages of that approach, and describes some of the challenges associated with estimating and projecting potential output. Chief among these is the difficulty of estimating the underlying trends in economic data series that are volatile, subject to structural change, and frequently revised. Those challenges are illustrated using examples based on recent experience with labor force growth, the Phillips curve, and labor productivity growth.

Suggested Citation

  • Robert W. Arnold, 2009. "The challenges of estimating potential output in real time," Review, Federal Reserve Bank of St. Louis, vol. 91(Jul), pages 271-290.
    • Handle: RePEc:fip:fedlrv:y:2009:i:jul:p:271-290:n:v.91no.4
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    References listed on IDEAS

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    1. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-174, Summer.
    2. Stephen D. Oliner & Daniel E. Sichel, 2000. "The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 3-22, Fall.
    3. David Brauer, 2007. "The Natural Rate of Unemployment: Working Paper 2007-06," Working Papers 18566, Congressional Budget Office.
    4. Robert Arnold, 2008. "Reestimating the Phillips Curve and the NAIRU: Working Paper 2008-06," Working Papers 20009, Congressional Budget Office.
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    Cited by:

    1. Siami-Namini, Sima & Hudson, Darren & Trindade, A. Alexandre & Lyford, Conrad, 2018. "Commodity Prices, Monetary Policy and the Taylor Rule," 2018 Annual Meeting, February 2-6, 2018, Jacksonville, Florida 266719, Southern Agricultural Economics Association.
    2. repec:ptu:bdpart:a201006 is not listed on IDEAS
    3. Ms. Valerie Cerra & Ms. Sweta Chaman Saxena, 2017. "Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and its Policy Implications," IMF Working Papers 2017/250, International Monetary Fund.
    4. repec:prg:jnlpep:v:preprint:id:573:p:1-15 is not listed on IDEAS
    5. Mateusz Machaj, 2016. "Can the Taylor Rule be a Good Guidance for Policy? The Case of 2001-2008 Real Estate Bubble," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(4), pages 381-395.
    6. Fatás, Antonio & Singh, Sanjay R., 2024. "Supply or demand? Policy makers’ confusion in the presence of hysteresis," European Economic Review, Elsevier, vol. 161(C).

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