Working Paper: NBER ID: w23580
Authors: Olivier Coibion; Yuriy Gorodnichenko; Mauricio Ulate
Abstract: The fact that most of the persistent 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. Using a variety of estimates of potential output for the U.S. and other countries, we show that these estimates respond gradually not only to supply-side shocks but also respond to demand shocks that have only transitory effects on output. Observing a revision in measures of potential output therefore says little about whether concurrent changes in actual output are likely to be permanent or not. In contrast, some structural VAR methodologies can avoid these shortcomings, even in real-time. These approaches point toward a more limited decline in potential output following the Great Recession.
Keywords: Potential Output; Economic Shocks; Great Recession
JEL Codes: E2; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary shocks (E39) | Estimates of potential GDP (E23) |
| Monetary shocks (E39) | Actual GDP (E20) |
| Productivity shocks (O49) | Estimates of potential GDP (E23) |
| Tax shocks (H26) | Estimates of potential GDP (E23) |
| Government spending shocks (E62) | Estimates of potential GDP (E23) |
| Oil price shocks (Q43) | Estimates of potential GDP (E23) |
| Oil price shocks (Q43) | Actual GDP (E20) |
| Supply shocks (E39) | Estimates of potential output (E23) |
| Demand shocks (E39) | Estimates of potential output (E23) |
| Blanchard and Quah approach (E19) | Estimates of potential output (E23) |