Should-Read: Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate: Real-Time Estimates of Potential GDP: Should the Fed Really Be Hitting the Brakes?

Should-Read: State-of-the-art, and very best thing I have seen recently on what potential output really is in the United States today: Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate: Real-Time Estimates of Potential GDP: Should the Fed Really Be Hitting the Brakes?: “CBO’s and other similar estimates of potential output are too pessimistic…

…they encourage policymakers, such as those at the Federal Reserve, to accept lower levels of potential than those which could be achieved. This pessimistic view and associated policies could be extremely costly….

In deriving potential GDP, current methods used by key agencies tend to under-respond to the shocks they should respond to and over-respond to the shocks that they should not respond to. Most recently, this has led to some frequently used estimates of potential GDP that are as much as $1.2 trillion, or nearly $10,000 per household, below our preferred estimate. Methods that do not feature the under-/over-responsiveness problem we document imply that more active stimulus on the part of the Federal Reserve is warranted to enable actual GDP to finally catch up to potential. The benefits of this policy shift would include significantly greater household incomes and higher employment levels than those engendered by the current policy stance…