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July/August 2009, 
Vol. 91, No. 4
Posted 2009-07-01

What Do We Know (And Not Know) About Potential Output?

by Susanto Basu and John G. Fernald

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.