Recessions and Potential Output: Disentangling Measurement Errors, Supply Shocks, and Hysteresis Effects

Dovern J, Zuber C (2020)


Publication Language: English

Publication Type: Journal article, Original article

Publication year: 2020

Journal

Book Volume: 122

Pages Range: 1431-1466

Journal Issue: 4

URI: https://onlinelibrary.wiley.com/doi/epdf/10.1111/sjoe.12385

DOI: 10.1111/sjoe.12385

Abstract

This paper investigates expert revisions of potential output (PO) estimates following recessions. Using data from the Organisation for Economic Co‐operation and Development (OECD), we show that downward revisions are substantial, permanent, and mostly driven by supply shocks. In contrast, PO estimates do not significantly react to demand shocks. Revisions are also partly caused by 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 correlated with post‐recession PO revisions. Our results call for improved methods for estimating PO and provide evidence against the existence of substantial hysteresis following demand shocks.

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APA:

Dovern, J., & Zuber, C. (2020). Recessions and Potential Output: Disentangling Measurement Errors, Supply Shocks, and Hysteresis Effects. Scandinavian Journal of Economics, 122(4), 1431-1466. https://dx.doi.org/10.1111/sjoe.12385

MLA:

Dovern, Jonas, and Christopher Zuber. "Recessions and Potential Output: Disentangling Measurement Errors, Supply Shocks, and Hysteresis Effects." Scandinavian Journal of Economics 122.4 (2020): 1431-1466.

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