Different concepts of potential GDP

For serious macroeconomists, the magnitude (or existence) of the output gap is a central factor for determining the appropriate policy actions (see for instance Weidner and Williams). In several recent posts, I've discussed the variety of approaches to estimating the output gap [0] [1]. A recent symposium on Projecting Potential Growth published by the Federal Reserve Bank of St. Louis is an excellent resource for anybody who wants to think seriously and carefully about the challenges in estimating this variable. In the lead article entitled "What Do We Know (And Not Know) About Potential Output?", the authors John Fernald and Susanto Basu write:

To keep the discussion manageable, we confine our discussion of potential output to neoclassical growth models with exogenous technical progress in the short and the long run; we also focus exclusively on the United States. We make

As James Morley has pointed out, often a sharp economic downturn is followed by an equally sharp economic recovery. One reason for that is the liquidation of inventories that accompanies any recession and restocking that takes place in recovery. What should we expect this time?

The graph below shows inventory investment as a percentage of U.S. GDP since 1947. There's been an improvement over time in inventory management, which I captured with a downward-sloping linear time trend. [Incidentally, this graph and many of the calculations that follow are constructed using the original nominal magnitudes. You can make mistakes looking at a number like the ratio of real inventory investment to real GDP since the respective deflators are different, whereas the ratio of two nominal magnitudes is always in correct natural real units, namely, percent of GDP.]

Washington University Professor James Morley on typical recession shapes and why they suggest we might see a strong recovery.

Harvard Professor Lucian Bebchuk on how to buy troubled assets while avoiding some of the problems pointed out by many analysts.

Oil 101 looks like a useful new book by commodity trader Morgan Downey.

And the Shadow Open Market Committee is back in business.

Today I outsource to a couple of links I found interesting:

Dave Cohen on oil prices.

Stephen Gordon on economists' fatal flaw.

James Morley on the need for a new Fed-Treasury accord.