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The concept of potential output has played an important role in economic analysis and policy debate at least since the 1960s. Usually defined as the productive capacity that would be feasible under full utilisation of all factors of production, it is a central reference variable in economic theories and provides the starting point for analysing the current status of the economy. Potential output is...
Germany’s relatively weak growth performance since the mid-1990s in comparison with other countries has given rise to policy and academic debate in recent years focusing on the possible reasons for this decline in economic dynamism. Figure 17 outlines the decline in real economic growth in Germany since the mid- 1980s. A substantial growth gap has also opened up with respect to the euro area and OECD...
This chapter outlines the economic conditions and theoretical ideas prevailing at the times of origin of the concept of potential output. In general, Okun (1962) is considered as the starting point for the development of methods for calculating potential output and output gaps (Section 2.2). However, the standard methods have been heavily criticised by proponents of the New Neoclassical Synthesis...
A central insight of the analyses in this study is that the potential output of an economy is neither theoretically unambiguously defined nor is it empirically identifiable in an uncontroversial manner. Indeed, basic static definitions such as the first definition introduced by Arthur Okun in 1962 (“the amount of output an economy can produce as it approaches full employment and full capacity utilization...
Chapter 2 chronologically surveyed the development of the concepts of “potential output” and “output gaps” in macroeconomic theories. The present chapter examines key problems in four areas related to these concepts. The first area concerns the problem of aggregation. Since estimations based on economic theory mostly rest on the idea of a macroeconomic production function, we assess the explanatory...
While the methods for assessing potential GDP growth discussed in chapter 5 were characterized by their retrospective nature, we now consider the case where forward-looking information enters the projection as well. In particular, this part of the project investigates whether information contained in the term structure of interest rates may be useful for assessing future economic growth. This part...
This part of the study discusses the implicit epistemological assumptions of the concept of potential output with respect to the key characteristics of the economic system as well as the resulting prospects and limitations for forecasting potential output. As a theoretical framework for this discussion we employ the conception of general systems theory, which is designed for the investigation of the...
The history of the idea of potential output (chapters 2 and 3) shows how difficult it is to pin down this concept even from a purely theoretical perspective. How much more difficult must it, therefore, be to come up with an empirical definition of potential growth? A series of standard procedures for determining potential output have, nonetheless, been established in recent decades and are considered...
In spite of the widespread use of the concept of potential output in economic theory and empirical applications as well as in economic policy debates, the historical background and the assumptions inherent to this concept are rarely made transparent, let alone critically questioned. Against this background this book sets out to determine the extent to which the concept of potential output rests on...
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