A New Measure of US Potential Output, Inflation Forecasts, and Monetary Policy Rules
21 Pages Posted: 13 Oct 2009
Abstract
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.
Suggested Citation: Suggested Citation
Harvie, Charles and Huh, Hyeon-Seung, A New Measure of US Potential Output, Inflation Forecasts, and Monetary Policy Rules. The Manchester School, Vol. 77, Issue 5, pp. 611-631, September 2009, Available at SSRN: https://ssrn.com/abstract=1487298 or http://dx.doi.org/10.1111/j.1467-9957.2009.02114.x
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