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Recessions and Instable Estimates of Potential Output

Dovern, Jonas

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Abstract

This paper analyzes how the OECD revises potential output (PO) estimates after recessions. We show that downward revisions are substantial and mostly driven by supply shocks while PO estimates do not significantly react to demand shocks. In addition, revisions are partly caused by avoidable mismeasurement of PO before recessions. In particular, we show that the length of the preceding boom and pre-recession values of the current account balance and credit volumes are predictors of post-recession PO revisions. Our results call for improved methods for estimating PO and provide evidence against the existence of substantial hysteresis effects of demand shocks.

Item Type: Working paper
Series Name: Discussion Paper Series
Volume: 0639
Publisher: University of Heidelberg
Place of Publication: Heidelberg
Date Deposited: 10 Nov 2017 13:35
Date: 8 November 2017
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Controlled Keywords: potential output, trend, output gap, hysteresis, OECD
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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