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Multivariate Filter Estimation of Potential Output for the United States: An Extension with Labor Market Hysteresis
Author:
Ali Alichi
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,
Hayk Avetisyannull

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,
Mr. Douglas Laxton
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,
Shalva Mkhatrishvilinull

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,
Armen Nurbekyannull

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,
Lusine Torosyannull

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, and
Hou Wang
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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 035
Language:
English
Publication Date:
19 Feb 2019
DOI:
https://doi.org/10.5089/9781484398067.001
ISBN:
9781484398067
ISSN:
1018-5941
Pages:
35
Keywords:
WP; NAIRU; Macroeconomic Modeling; Potential Output; output gap shock; unemployment gap; output gap estimate; Volcker recession; inflation target shock; output gap in the with-hysteresis model; inflation expectation; Output gap; Labor markets; Unemployment rate; Inflation
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper extends the multivariate filter approach of estimating potential output developed by Alichi and others (2018) to incorporate labor market hysteresis. This extension captures the idea that long and deep recessions (expansions) cause persistent damage (improvement) to the labor market, thereby reducing (increasing) potential output. Applying the model to U.S. data results in significantly smaller estimates of output gaps, and higher estimates of the NAIRU, after the global financial crisis, compared to estimates without hysteresis. The smaller output gaps partly explain the absence of persistent deflation despite the slow recovery during 2010-2017. Going forward, if strong growth performance continues well beyond 2018, hysteresis is expected to result in a structural improvement in growth and employment.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2019: Issue 035