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Measuring potential economic growth.

How much do economists know about measuring potential economic output? That question is the theme of the July/August 2009 issue of the Federal Reserve Bank of St. Louis Review, in which seven papers presented at the Bank's 2008 policy conference are published. Measuring potential economic output--defined as the maximum sustainable level of output--is integral to maximizing employment while keeping prices stable. To make rational decisions, policymakers need to know the difference between actual and potential output (the "output gap") and they need to understand how and why the actual rate of inflation often differs from the targeted rate.

Each of the articles in the July/August Review deals with some aspect of potential output growth and its measurement. The first two papers are highly theoretical: one addresses neoclassical growth models and argues that a two-sector model is preferable because technological shocks have different effects on investment goods and consumption goods; the second theoretical paper embeds a production function--which specifies total output for all combinations of inputs--within a dynamic stochastic general equilibrium model and argues that policymakers need models which enable them to compare flexible price concepts based on the production function approach with those based on the real business cycle approach.

Two of the papers deal with the effects of using "real-time" data in measuring potential output: one analyzes the role the output gap has played in Canadian monetary policy, particularly in relation to projections used by Canada's central bank; the second employs a state-space model to estimate the "true" unobserved measure of total output in the United States. Two of the papers use an empirical approach to measure potential output: one stresses that potential is less a "technological ceiling" than it is a measure of the maximum sustainable output; the other looks at the role of labor force trends in measuring potential output, particularly life expectancy, household net worth, and the unemployment rate. Finally, one of the papers examines the issue of measuring potential output in China, a rapidly developing country, compared with measuring potential output in the United States and the European Union.

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Title Annotation:Precis
Publication:Monthly Labor Review
Geographic Code:1USA
Date:Sep 1, 2009
Previous Article:Financial literacy.
Next Article:Notes on current labor statistics.

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