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March 2016 issue
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Measuring Potential Growth with an Estimated DSGE Model of Japan's Economy

by Takuji Fuekia, b, Ichiro Fukunagaa, c, Hibiki Ichiuea and Toyoichiro Shirotaa

Abstract

In this paper, we calculate the potential output and the output gap using a Bayesian-estimated DSGE model of Japan's economy. For bridging the gap with conventional measures, we define our measure of potential output as a component of the efficient output generated only by persistent growth rate shocks. Our potential growth displays a high degree of smoothness and moves closely with conventional measures. Moreover, the output gap from our measure of potential output shows better forecasting performance for inflation—in particular, at short horizons—than other measures of output gap.

JEL Codes: E32, E37, O41, O47.

 
Full article (PDF, 32 pages, 1129 kb)


a Bank of Japan
b Indiana University
b International Monetary Fund