A New Measure of US Potential Output, Inflation Forecasts, and Monetary Policy Rules

21 Pages Posted: 13 Oct 2009

See all articles by Charles Harvie

Charles Harvie

University of Wollongong

Hyeon-Seung Huh

Hallym University - Department of Economics

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

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

Charles Harvie (Contact Author)

University of Wollongong ( email )

Wollongong, NSW 2522
Australia

Hyeon-Seung Huh

Hallym University - Department of Economics ( email )

Chunchon Kangwon, 200-702
South Korea
82-33-240-1309 (Phone)
82-33-255-9109 (Fax)

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