Abstract
This paper proposes a new measure of potential output for the USA. The key idea is that potential output is constructed as the level of output which would correspond to aforecastof no inflation change over the policy horizon. The resultant output gap has a clear interpretation as a measure to gauge future inflationary pressures. It also exhibits better predictability for future inflation changes in comparison with previous output gap measures. Simulation results further demonstrate its usefulness as a feedback variable in the Taylor monetary policy rule for interest rates.
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