Alternative Visions of Potential Output

This entry analyses potential output theoretically, arguing that its empirical measurement depends on alternative views of the relationship between actual and potential output. Mainstream approaches conceive potential output as a supply-determined equilibrium around which actual output fluctuates. Demand-led approaches, by contrast, regard it as a capacity ceiling that may remain persistently above actual output and whose evolution over time is shaped by aggregate demand. The entry shows that estimation methods reflect such distinct theoretical premises. It classifies them into four categories, depending on the main constraint on output growth that the different methodologies regard as relevant, and discusses in addition long-term projections of potential growth. It concludes by stressing the policy relevance of the methodological choices.