Potential GNP: Its Measurement and Significance -- A Dissenting Opinion
President, Federal Reserve Bank of Philadelphia, retired
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Carnegie-Rochester Conference Series on Public Policy
(supplement to Journal of Monetary Economics), 10 (Spring 1979) 179-186
This paper points out some of the econometric and conceptual difficulties with
defining and measruing "potential output." Most efforts to estimate potential
output, including the paper by Perloff and Wachter, are essentially trend extrapolation
of output. Approaches differ concerning whether the trend line should pass through
the peaks of past output (as Okun's approach implies when the "full-employment"
unemployment rate is set equal to 4 percent) or through the middle of past output
(as impleid by Perloff and Wachter). The former approach produces an "output
gap" that is always positive, implying continual need for stimulative government
policies. Given the serious conceptual and econmetric difficulties with such
measures, we doubt the usefulness of such measures as guides to policy.
Key words: Potential output, extrapolation
JEL Classifications: E62, C22
Cited 12 times in the SSCI and SCOPUS through 2016
© Copyright 1979, Elsevier
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