OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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English, French

The OECD potential output estimation methodology

This paper describes the methodology used in the OECD Economics Department to produce historical estimates and short-run projections of potential output. These estimates are used mainly in the OECD Economic Outlook, in country surveys and as starting point for long-run scenarios. Total-economy potential output is modelled using a constant-returns-to-scale Cobb-Douglas production function with fixed factor shares. The three main inputs are labour, fixed capital excluding housing and labour efficiency, the latter obtained as a decomposition residual. The trend unemployment rate is estimated by Kalman filtering within a forward-looking Phillips curve. Other trend components are obtained by HP-filtering but labour efficiency and the labour force participation rate are cyclically adjusted before filtering to help alleviate the end-point problem associated with filters. This pre-filtering cyclical adjustment is especially helpful at cyclical turning points. It helps to lower the cyclicality of potential output as well as the extent of future revisions.


Keywords: labour efficiency, potential output, potential growth, NAIRU, capital stock, output gap
JEL: E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles; E20: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General
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