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Monetary Policy with Uncertain Estimates of Potential Output; Mntr pl th nrtn tt f ptntl tpt Knnth Kttnr Ae yeas o egec oe- ase o e uemoyme ae Seco i ia ouu as aw eewe oies a way o cacuae e uceaiy aeio as a iu o moe- associae wi e esimae wic is aicu- ay oicy aeaig i a ay imoa o oicymakes cage wi oa age o ece eea keeig ouu a o ea oeia e ia esee sysem a acaemic eseac A secio o e aice igigs e acica oe ee i is e raison d' etre o a aciis imicaios o is uceaiy a eamies moeay oicy I oeia ouu measues is oe uig e ai easio o 19-9 e ecoomys caaciy o ouce goos a seices wiou aig o iaioay es- Wht ptntl tpt? sues e goa o a saiiaio oicy sou I oaes ems oeia ouu is a e o kee e ecoomy oeaig as cose o measue o e ecoomys oea oucie oeia as ossie caaciy o is equiiium ee o ouu I Wie is sigiicace is wiey ackow- oe wos oeia ouu is suose o ege ee is ie ageeme o e es summaie e sae o e suy sie o e measue o oeia ouu Ui i was is- ecoomy wose mai eemias ae ao coiue e yeas ago e seies maiaie caia a ouciiy ucuaios i ese y e Couci o Ecoomic Aisos (CEA a oe suy sie acos—oi ices o a uise i e Economic Report of the eame—a coiue o aiaio i e President was oay e mos omie; gow o oeia ouu oug ime sice e a ume o comeig measues I coas o suy socks wic aec ae aeae e is secio o is aice oeia as we as acua ouu ema iscusses i geae eai wa i is a oe- socks ae e ecoomys saus relative o ia ouu is suose o measue a eiews oeia Eames icue moeay a some o e esimaes i cue use isca oicy as we as eogeous cages i e e secio iscusses a ew ecique cosumio iesme o ema o US o esimaig oeia ouu is meo eos Isuicie aggegae ema may ies om eisig measues y eiciy esu i a ee o ouu a wic acos o moeig oeia ea G as a uose- oucio ae ess a uy emoye; simi- ae aiae usig aa o ouu gow a ay ecess aggegae ema may emoai- iaio o ie is ee I aso oes wo y i e ecoomy aoe is equiiium ee sigiica aaages oe eisig measues Knnth Kttnr nr nt t th dr is ecause i is eie i ems o iaio l rv n f Ch. h thr thn i is o ueae o e sucua cages i Stv Strnn nd Mr Wtn fr thr e ao make a ae isoe measues nt. 2 ( 1I; ESECIES o ouu is aoomy o socks i ems o suy socks Sice e muc o e e- suy o ema suggess eiig oeia seac o oeia ouu as ocuse o ca- ouu as u-emoyme oucio coe- uig e ime-aiaio iuce y aggegae soig o e ea G e ecoomy wou suy sis ouce i e asece o ema socks I An d n ll vr trdtnl oe wos wi e ecoomy oeaig ea prptv n ptntl tpt oeia ao a caia wi e uiie o a ecoomiss agee a i makes as uy as ossie gie ay suy sie sese o escie usiess cyces i ems o cosais eaues om oeia ouu a isagee- A aeaie u comemeay eii- me a suaces i we kow ece ie- io o oeia ouu eois e ik e- meiae ee macoecoomics eooks A wee ouu a iaio emoie i e iscussio o oeia G aeas omie- aggegae suy cue e aggegae suy y i e ioucio o ousc a isc- ucio escies a osiie eaiosi e- es (199 ook wose iew is cosise wi wee ees o ea ouu a e iaio e esciio o oeia ouu skece ae muc as e we kow iis Cue aoe y coas e suec eceies o escies e egaie coeaio ewee e meio a a i aos (199 e uemoyme ae a iaio owee i aos omissio o ay iscussio o as og ee ecogie a is ouu-ia- oeia G eecs e ew Cassica a- io aeo woks oy i e so u; a is oac o usiess cyces as emoie i e i e og u e aggegae suy cue is ea usiess Cyce (C eoy ioeee eica eeoe a sae iaio ae—oe y Kya a esco (19 4 C eoy a is eie iceasig o eceasig—is asses a ecoomic ucuaios ae e ou- ossie oy wi ouu equa o oeia come o comeiie equiiia i wic wages is coecio ewee oeia ouu a ices aus aiy o cea a makes a a sae iaio ae isie Au Accoig o is iew suy socks (usuay Okus (197 eiiio i wic oeia aee ecoogy socks ae e soe souce ouu is e "maimum oucio wiou o ucuaios i ea ecoomic aiaes suc iaioay essue o moe ecisey e as ouu a emoyme ema socks oi o aace ewee moe ouu a yicay aec oy omia aiaes—e geae saiiy" So og as ee is a sae aggegae ice ee o isace—wiou eaiosi ewee emoyme (o caaciy aecig eaie ices ea ouu o emoy- uiiaio a iaio is oiaioay me Accoig o e C iew eeoe caaceiaio o oeia ouu is comai- i makes o sese o isiguis ewee acua e wi is eiiio as u-emoyme ou- a u-emoyme ouu Wi ouu e- u Coceuay eiig oeia ouu i emie eiey y e suy sie o e ems o sae iaio simy sis e ocus ecoomy oeia ouu is simy equa o om is ueyig eemias o is ia- acua ouu ioay imicaios A a acica ee e e oicy imicaios o C eoy ae ik ewee oeia ouu a sae ia- a eacig I ese moes isceioay io oies e ouaio o e oeia moeay oicy ca ay o useu oe i ouu measue iscusse i is aice saiiig e ecoomy as e oy eec o Aoug oeia ouu is someimes moeay oicy is o e ice ee ue- associae wi a sime e ie ie o ea moe ecause e ecoomys ucuaios e- G oig i eie o ese aeaie su om comeiie equiiia ey ae eco- eiiios imies a e gow ae o o- omicay eicie° eeoe ee i ose eia ouu emais cosa oe ime e moes i wic moeay oicy ca aec souce o is eceio is a ougou ea aiaes oig so wi yicay euce muc o e 19s a og-iea e was wie- oea weae y use as a oy o oeia ouu As Ceay a ue C amewok as o escie eow ees o e 197s emo- ace eie o esimaig oeia ouu o sae a e saig-ie meo was sais- o usig i as a guie o macoecoomic oi- acoy oy i e asece o ay sigiica cy Isea iewig usiess cyces as ea- FEDERAL RESERVE RANK OF CHICAGO ues om oeia ouu is muc moe co- aaysis o Okus aw O e ee e seg- sise wi e so-cae aiioa aoac o mee e ecique is perhaps the simes macoecoomic ucuaios skece eaie yicay is ioes awig saig ie Aoug e meooogica ieeces e- segmes oug a o o (og ea G wee e aiioa a e cassica iews ae Giig eac ie segme is ow soe is a ee C moes ae a a mao imac o sime way o caue oca aiaios i e eseac a oows e aiioa aoac e gow ae imaiy y emosaig e imoace o A key isicio amog segmee e suy socks as a souce o usiess cyce measues ies i e coice o e segmes ucuaios e ew measue o oeia eois Oe we kow eame is e ouu iscusse i is aice akes is oo- mi-easio G seies uise y e siio seiousy a seeks o quaiy e ea- ueau o Ecoomic Aaysis (EA 8 oe ie imoace o suy a ema acos i e o ae o igue 1 (e seies is oe o a ogaimic scae As e ame Extn r f ptntl tpt imies e segmes eois ae e mi- Mos eisig measues o oeia G ois o usiess cyce easios wose ae eie o oe o moe o e oowig aes ae eemie ex post y e aioa eciques segmee es suy-sie ueau o Ecoomic eseac e owe IGUE Mi-easio G lrth f 82 dllr 8.4 — rnd 8.0 .6 .2 I I I I I I I I I I I 6 64 6 0 '73 6 '79 82 8 88 '91 prnt, nnl rt 4.0 — Grth rt .6 .2 2.8 2.4 2.0 I I I I I I i I I i I I I I I I I i i i i i i 6 64 6 0 '73 6 '79 82 8 88 '91 SOUCE: r f En Anl, Srv f Crrnt n. 4 ECONOMIC PERSPECTIVES ae o igue 1 os e auaie gow ow—coiue o e eakow o a ai- ae o mi-easio G wose saise ey o oeia ouu measues e isie- aeaace is ue o e segmee e co- gaio o measues ase o Okus aw wi a sucio o e seies ie aua ae o uemoyme was ese- e suy-sie aaysis a was e asis ciay cosicuous Wi uemoyme aes o e iscoiue CEA esimae is coceu- we aoe ece ese measues iicae ay muc moe soisicae a e mi- a ouu was a eow oeia ye iaio easio seies 9 is meo gauges oe- coiue o ise e usua measues o oe- ia ouu y way o a aggegae oucio ia ouu o oge seeme o coeso o ucio eaig aco ius—ao a cai- sae iaio eaig some oay Goo a—o ea ouu oeia ouu is e (1975 o use aeaie ime-ayig measues eemie y susiuig e u-emoyme o eai e eaio o iaio aues o ao a caia io e oucio e eeioaio o Okus aw ca e ucio e mai awack o is ecique ace o gow i e aks o e sucuay is is omiae aa equiemes ecause uemoye wokes wo ecause o sucu- quaey caia sock igues ae so ueiae a cage i e ecoomy a o eai o imemeaios o is meo usuay ocus eocae i oe o i ew emoyme I o ao ius Ee so i equies aa o esose o e ise i sucua uemoyme cycicay ause emoyme ous ao ecoomiss eise ei coceio o u em- oce aiciaio aes a ouciiy o oyme a e aguage use o escie i cosuc is esimae o u-emoyme ou- e awkwa ase "oacceeaig iaio u e osce a Mis (199 seies is a ae o uemoyme" eace "aua ae" eae measue wic aems o caue e aoiig e imicaio a sae iaio suy-sie eecs o oi ice socks a was ecessaiy associae wi a ow uem- cages i iiiuas magia a aes oyme ae ikewise e EA swice o e i commoy use ecique is wa i cae a "ig-emoyme ecmak" ase o Okus ceeae aw wic uses e ae o uemoyme equa o ece uemoyme ae as a oy o e ga e- is eeiece eose e Acies ee wee oeia a acua ouu Wi U o Okus aw as a ouaio o oeia eoig e uemoyme ae a eig ouu e uoseaiiy o e ime-ayig G a U eese oeia ea G a aua ae o uemoyme I U is eie e aua ae o uemoyme eseciey ie o oseae Okus aw meey e- Okus aw scies a eaiosi ewee wo uose- aes a cao e use y ise o comue (1 G = G • [1 + 3 (U – U] oeia G; oy i coucio wi some ieee measue o e aua ae o saes a e eceage eiaio o G uemoyme wi i yie a esimae o o- om oeia is ooioa o e ga e- eia ouu wee uemoyme a e aua ae e e oeia G seies oose y Cak coeicie o 3 meas a a 1 ece u- (193 a au (199 ae wo ece eam- emoyme ga coesos o a 3 ece ga es o measues ase o ieee esimaes ewee ea G a oeia I e aua o e aua ae o uemoyme aus ae is kow (Oku assume i was ece seies is acuay a yi measue comiig is equaio easiy eies a esimae o a Okus aw equaio wi a segmee e oeia G uig e ecoomicay quies- seciicaio o oeia ouu ike oe ce 195s a 19s a og-iea e o- segmee e measues i aso eies o some uce esimaes o oeia ouu eay ie- io eemiaio o e aoiae aes o ica o ose geeae y Okus aw wi U e eakois" equa o a cosa ece I ac ecause dd vr ndd tt i ouce a smooe seies Oku ecom- mee usig e e meo as a aea- Oe esseia isicio ewee ese ie o e aoe equaio aeaie eciques is e egee o wic e os iomaio a is wee e ees o e 197s—e oi sock e ey ey o 197-75 ecessio a e ouciiy sow- ey ae cosuce coemoaeousy o EEA ESEE AK O CICAGO 5 eoseciey A esimae o a gie qua- maes use oy cue a agge aa wie es ee o oeia G is one-sided i i wo-sie esimaes use o ags a eas uiies oy aa aaiae i a quae A e EAs mi-easio e G is a two-sided esimae o e oe a icoo- goo eame o a eiciy wo-sie mea- aes aa a ecome aaiae ae o sue ecause usiess cyce eaks ae ae isace a esimae o 199 oeia a we ae e ac e easios mioi use 19911 iaio wou e wo-sie; oe ca e eemie oy eoseciey—oi- a eie oy o aa oug 199 wou ousy oo ae o e o ay use o a oicy e oe-sie I oe wos oe-sie esi- esige o ae a ecessio o ouce a An econometric model of potential output The potential output measure proposed in Kuttner Having described the link between the unobserved (1991) builds on a statistical technique known as a level of potential output and observed realizations of dynamic factor or multiple-indicator model.
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