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Tuesday, February 24, 2015

'Long-Run Real GDP Forecasts: The Hopeless Task of Trying to Pierce the Veil of Time and Ignorance'

Brad DeLong:

Long-Run Real GDP Forecasts: The Hopeless Task of Trying to Pierce the Veil of Time and Ignorance Weblogging: Focus, by Brad DeLong: I draw somewhat different conclusions from the wavering track of potential GDP since 1990 than do the viri illustres Steve Cecchetti and Kermit Schoenholtz...
First, I think that monetary policymakers should not be looking at potential output and the output gap at all. They should be looking at the labor market. ...[graph 1, graph 2]
Second, I think that the most important macroeconomic research question of our age is the extent to which these fluctuations in the projected growth path arise because of signal-processing considerations in an environment in which the growth rate is subject to both transitory and permanent shocks, rather than to short-run shocks casting very long-run shadows. To the extent that it is the second–and the older I get the more it looks to me as though it might well be–the more it becomes the case that successful management of aggregate demand and the business cycle is the ball game, rather than just being an amuse bouche that it is nice to have.
Third, there is the question that I now harp upon incessantly of the relationship between measured real GDP and money-metric utility in a consumer-surplus sense. (Plus there is the question of the relationship between money-metric utility in a consumer surplus sense and societal well-being.)
Fourth, I question whether previous pre-1980 studies of the U.S. economy would reveal similar fluctuations in trend growth projections. In fact, as best as I can determine, it does not. Going back to the start of the 1890s, at least, and even with such enormous shocks as the Great Depression and World War II, straightforward projections of real GDP do not fluctuate nearly as much as those that have been made over the last twenty years...[graph 3] ... Is this an illusion? Accidental overlapping and offsetting shocks that just happened to sum to zero? It may well be...

    Posted by on Tuesday, February 24, 2015 at 07:39 AM in Economics, Productivity | Permalink  Comments (10)


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