Charles I. Plosser

President, Federal Reserve Bank of Philadelphia,
and University of Rochester, Rochester, NY 14627

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G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

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Carnegie-Rochester Conference Series on Public Policy
(supplement to Journal of Monetary Economics), 10 (Spring 1979) 179-186

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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

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Cited 5 times in the SSCI through 2006

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© Copyright 1979, Elsevier

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