A NEW MEASURE OF US POTENTIAL OUTPUT, INFLATION FORECASTS, AND MONETARY POLICY RULES

This paper proposes a new measure of potential output for the USA. The key idea is that potential output is constructed as the level of output which would correspond to a forecast of no inflation change over the policy horizon. The resultant output gap has a clear interpretation as a measure to gaug...

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Bibliographic Details
Published inThe Manchester school Vol. 77; no. 5; pp. 611 - 631
Main Authors HARVIE, CHARLES, HUH, HYEON-SEUNG
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing Ltd 01.09.2009
University of Manchester
SeriesManchester School
Subjects
Economic forecasting
Economic forecasts
Inflation
Inflation expectations
Macroeconomics
Monetary policy
Output
Output potential
Output rate
Simulation
Studies
U.S.A
United States > US
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Summary:This paper proposes a new measure of potential output for the USA. The key idea is that potential output is constructed as the level of output which would correspond to a forecast of no inflation change over the policy horizon. The resultant output gap has a clear interpretation as a measure to gauge future inflationary pressures. It also exhibits better predictability for future inflation changes in comparison with previous output gap measures. Simulation results further demonstrate its usefulness as a feedback variable in the Taylor monetary policy rule for interest rates.
Bibliography:Manuscript received 9.6.07; final version received 12.8.08.
istex:459A4918C80E5EF105F8E34547BFDE8EC9C13663
ark:/67375/WNG-W1S5M8L9-J
ArticleID:MANC2114
The authors wish to thank two anonymous referees for very constructive comments. This work was supported by Yonsei University Research Fund. Any remaining errors are the authors' responsibility.
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ISSN:1463-6786
1467-9957
DOI:10.1111/j.1467-9957.2009.02114.x