March 2016 issue contents
Measuring potential growth with an estimated DSGE model of Japan's economy

by Takuji Fueki^{a, b}, Ichiro Fukunaga^{a, c}, Hibiki Ichiue^a and Toyoichiro Shirota^a

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