Review

This conference concerns measurement of the economy’s potential output. The concept of potential output is straightforward to define—the economy’s maximum sustained level of output—but difficult to measure.

Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and they often assume that potential output is a smooth series in the short run—approximated by a medium- or long-run estimate.

Commentary on "What Do We Know (And Not Know) About Potential Output?" by Susanto Basu John G. Fernald.

This article aims to better understand the factors driving fluctuations in potential output measured by the production function approach (PFA).  The authors integrate a production function definition of potential output into a large-scale dynamic stochastic general equilibrium (DSGE) model in a fully consistent manner and give two estimated versions based on U.S. and euro-area data.

Commentary on "Issues on Potential Growth Measurement and Comparison: How Structural Is the Production Function Approach?" by Christophe Cahn and Arthur Saint-Guilhem.

The output gap—the deviation of output from potential output—has played an important role in the conduct of monetary policy in Canada. This article reviews the Bank of Canada’s definition of potential output, as well as the use of the output gap in monetary policy.

Commentary on "Parsing Shocks: Real-Time Revisions to Gap and Growth Projections for Canada" by Russell Barnett, Sharon Kozicki, and Christopher Petrinec.

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.

Commentary on "The Challenges of Estimating Potential Output in Real Time" by Robert W. Arnold.

Trend growth in the labor force is a key determinant of trends in employment and gross domestic product (GDP). Forecasts by Macroeconomic Advisers have long anticipated a marked slowing in trend growth of the labor force that would contribute to a slowing in potential GDP growth.

Commentary on "Trends in the Aggregate Labor Force" by Kenneth J. Matheny.

The authors use a growth accounting framework to examine growth of the rapidly developing Chinese economy. Their findings support the view that, although feasible in the intermediate term, China’s recent pattern of extensive growth is not sustainable in the long run.

Commentary on "Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union" by Jinghai Zheng, Angang Hu, and Arne Bigsten.

This study uses a state-space model to estimate the “true” unobserved measure of total output in the U.S. economy. The analysis uses the entire history (i.e., all vintages) of selected real-time data series to compute revisions and corresponding statistics for those series.

Commentary on "Estimating U.S. Output Growth with Vintage Data in a State-Space Framework" by Richard G. Anderson and Charles S. Gascon.

Carlos Hamilton Araujo focuses on potential output growth in monetary policymaking in Brazil. Seppo Honkapohja offers definitions of potential output and potential growth and addresses the need to consider uncertainty in forecasting models. James Bullard focuses on the “proper” detrending of aggregate data.