The Cyclical Sensitivity in Estimates of Potential Output

NBER Working Paper No. 23580

Issued in July 2017, Revised in October 2017

NBER Program(s):Economic Fluctuations and Growth, Monetary Economics



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. These approaches point toward a more limited decline in potential output following the Great Recession.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w23580

Published: Olivier Coibion & Yuriy Gorodnichenko & Mauricio Ulate, 2018. "The Cyclical Sensitivity in Estimates of Potential Output," Brookings Papers on Economic Activity, vol 2018(2), pages 343-441. citation courtesy of

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