Skip to main content
Return to Brookings Papers on Economic Activity
A man looks at a screen displaying news of markets update inside the Bombay Stock Exchange (BSE) building in Mumbai, India, February 11, 2016. Indian shares fell more than 3 percent on Thursday and headed for their biggest daily falls in nearly six months, hitting their lowest levels since May 2014, as fears of a slowdown in the global economy hit markets worldwide. REUTERS/Danish Siddiqui - GF10000304542
BPEA Article

The cyclical sensitivity in estimates of potential output

, , and
Editor's Note:

This paper is part of the Fall 2018 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Economics Professor Janice Eberly and James Stock, Brookings Nonresident Senior Fellow and Harvard University economics professor. Read summaries of all five papers from the journal here.

Abstract

The fact that 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. We show that real-time estimates of potential output for the U.S. and other countries respond gradually and similarly to both transitory and permanent shocks to output. Observing revisions in measures of potential output therefore tells us little about whether changes in actual output will be permanent or not. Some structural VAR methodologies can avoid these shortcomings. These approaches suggest a much more limited decline in potential output following the Great Recession.

Citations

Coibion, Olivier, Yuriy Gorodnichenko, and Mauricio Ulate. 2018. “The Cyclical Sensitivity in Estimates of Potential Output” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation.

Authors

Get daily updates from Brookings