International Finance Discussion Papers (IFDP)
August 1996
Inflation-Adjusted Potential Output
Jane T. Haltmaier
Abstract:
This paper estimates potential output for seven countries using a multivariate version of the Hodrick-Prescott filter in which observations on inflation are used to help separate trend from cyclical movements in output. The potential series are estimated first on an aggregate basis, and then by disaggregating output into three major components: labor productivity, the employment-population ratio, and population. Potential levels of productivity and the employment-population ratios are calculated using the multivariate filter and combined with actual population to derive an alternative, "disaggregated" estimate of potential. The method is then applied to forecasting potential growth.
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