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Measuring Potential Growth with an Estimated DSGE Model of Japan's Economy

December 2010
Takuji Fueki*1
Ichiro Fukunaga*2
Hibiki Ichiue*3
Toyoichiro Shirota*4

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Abstract

In this paper, we calculate the potential output and the output gap using a Bayesian-estimated DSGE model of Japan's economy. The model is a two-sector growth model that takes into account growth rate shocks including investment-goods sector-specific technological progress. For bridging the gap with conventional measures, we define our measure of potential output as a component of the efficient output generated only by growth rate shocks. Our potential growth displays a high degree of smoothness and moves closely with conventional measures. Moreover, the output gap from our measure of potential output has forecasting power for inflation. We analyze the sensitivity of our measure to the specifications of monetary policy rules, labor supply shocks, price and wage markup shocks, and technology shocks as well as the robustness with respect to data revisions and updates.

Keywords
Potential growth; Output gap; Dynamic stochastic general equilibrium model; Bayesian estimation; Real-time data

JEL classification
E32; E37; O41; O47

The authors are grateful to Malin Adolfson, Kosuke Aoki, Gianluca Benigno, Gunter Coenen, Kai Christoffel, Stefan Lasseen, Kevin Sheedy, Etsuro Shioji, Lars Svensson, Karl Walentin, participants at Chief Economists' Workshop at Bank of England and seminar at Sveriges Riksbank, and the staff at the Bank of Japan for helpful comments and discussions. The authors also thank Ikuo Takei for excellent assistance with manuscript preparation. Views expressed in this paper are those of the authors and do not reflect those of the Bank of Japan.

  •   *1 Research and Statistics Department, Bank of Japan E-mail : takuji.fueki@boj.or.jp
  •   *2 Research and Statistics Department, Bank of Japan E-mail : ichirou.fukunaga@boj.or.jp
  •   *3 Monetary Affairs Department (formerly Research and Statistics Department), Bank of Japan E-mail : hibiki.ichiue@boj.or.jp
  •   *4 Financial System and Bank Examination Department (formerly Research and Statistics Department),
    Bank of Japan E-mail : toyoichirou.shirota@boj.or.jp

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