An Eclectic Approach to Estimating U.S. Potential GDP

The authors describe the principal results obtained from a new method applied to the estimation of potential U.S. GDP. This method derives from the work of Rennison (2002), which suggests that the joint use of extended multivariate filters and structural vector autoregression models is optimal for estimating potential output. The authors use this approach to estimate the two components of potential GDP: the full-employment labour input and trend labour productivity. This decomposition is particularly useful for identifying sources of fluctuations in potential output. It reveals, for example, that the vigorous growth rate of potential output recorded during the second half of the 1990s is attributable to a fall in the structural rate of unemployment and a marked upswing in trend productivity growth. This approach also reveals that the excess supply observed in the second quarter of 2002 is entirely attributable to the fact that the labour input was below its equilibrium level.

Published In:

Empirical Economics (0377-7332)
November 2006. Vol. 31, Iss. 4, pp. 951-75