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Potential and natural output

Author

Listed:
  • Giorgio Primiceri

    (Northwestern University)

  • Alejandro Justiniano

    (Chicago Fed)

Abstract

We estimate a DSGE model with imperfectly competitive products and labor markets, and sticky prices and wages. We use the model to back out two counterfactual objects: potential output, i.e. the level of output that would prevail under perfect competition, and natural output, i.e. the level of output that would prevail with flexible prices and wages. We find that potential output is smooth, resulting in an output gap that closely resembles traditional measures of detrended output. Meanwhile natural output is extremely volatile, due to the very high variability of wage markup shocks. These disturbances, however, are very similar to measurement errors because they only explain price and wage inflation at very high frequencies. Under this alternative interpretation, potential and natural output move one-to-one.

Suggested Citation

  • Giorgio Primiceri & Alejandro Justiniano, 2009. "Potential and natural output," 2009 Meeting Papers 25, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:25
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    Cited by:

    1. Jordan Roulleau-Pasdeloup & Anastasia Zhutova, 2015. "Labor Market Policies and the "Missing Deflation" Puzzle: Lessons from Hoover Policies during the U.S Great Depression," Cahiers de Recherches Economiques du Département d'économie 15.05, Université de Lausanne, Faculté des HEC, Département d’économie.
    2. Jordan Roulleau‐Pasdeloup & Anastasia Zhutova, 2022. "Labor Market Policies in a Deep Recession: Lessons from Hoover's Policies during the U.S. Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 247-283, February.
    3. Sébastien Charles & Thomas Dallery & Jonathan Marie, 2018. "Some Thoughts and Proposals Concerning the Concept of Output Gap [Réflexions et suggestions autour du concept d’output gap]," Post-Print hal-02335667, HAL.
    4. Kiley, Michael T., 2013. "Output gaps," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 1-18.
    5. Binning, Andrew & Bjørnland, Hilde C. & Maih, Junior, 2019. "Is monetary policy always effective? Incomplete interest rate pass-through in a DSGE model," Working Paper 2019/22, Norges Bank.
    6. Sharma, Saurabh & Behera, Harendra, 2022. "A dissection of Indian growth using a DSGE filter," Journal of Asian Economics, Elsevier, vol. 80(C).
    7. Tóth, Máté, 2021. "A multivariate unobserved components model to estimate potential output in the euro area: a production function based approach," Working Paper Series 2523, European Central Bank.

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