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An Alternative Proxy Measure for Slack

Summary:
In this blog, we’ve recently covered production function/bean counting, inverted Phillips curve, and statistical techniques for estimating the level of potential GDP relative to actual GDP — that is the extent of economic slack. Struyven/Hatzius/Bhushan at Goldman Sachs estimate slack at several percentage points greater than that implied by the CBO measure. Using the employment/population ratio for men aged 25-54 in late 2019/early 2020 relative to its level in 2005-2007, they find that the extent of slack is some 3-4 percentage points larger than the CBO output gap. Source: Struyven, Hatzius, and Bhushan, “There Is More Slack Than They Think?” Goldman Sachs, February 16, 2021. For December 2020, Goldman Sachs estimates US slack at 6% vs. 3% as average of CBO, IMF, OECD et al.

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In this blog, we’ve recently covered production function/bean counting, inverted Phillips curve, and statistical techniques for estimating the level of potential GDP relative to actual GDP — that is the extent of economic slack. Struyven/Hatzius/Bhushan at Goldman Sachs estimate slack at several percentage points greater than that implied by the CBO measure.

Using the employment/population ratio for men aged 25-54 in late 2019/early 2020 relative to its level in 2005-2007, they find that the extent of slack is some 3-4 percentage points larger than the CBO output gap.

An Alternative Proxy Measure for Slack

Source: Struyven, Hatzius, and Bhushan, “There Is More Slack Than They Think?” Goldman Sachs, February 16, 2021.

For December 2020, Goldman Sachs estimates US slack at 6% vs. 3% as average of CBO, IMF, OECD et al. estimates (My estimates approximating a plucking model a la Delong-Summers is 4%).

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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