Paul Krugman: Potential Mistakes (Wonkish)


Update: I should have mentioned that the CBO doesn’t use the filtering method in its estimates for the US; as best I understand it, it uses a production function approach that is much less likely to interpret a prolonged slump as a decline in potential output. And that’s a very good thing.

I missed this, from a couple of days ago: the European Commission has, rather belatedly, woken up to the likelihood that it is understating potential output in debtor countries, overstating their “natural” rate of unemployment, and therefore underestimating the degree of fiscal austerity being imposed. There is, it turns out, an Output Gap Working Group considering these questions, and I’m glad to hear it.

For I’ve been warning about this issue for a long time — not just in the current slump, but 15 years ago, in the context of Japan (pdf).

Some notes on the issue after the jump.

Read more…

Economics and Politics by Paul Krugman – The Conscience of a Liberal –

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