Showing papers on "Potential output published in 1978"

Economic Fluctuations: A Framework for Analysis and Policy Design

Abstract: A general framework for assessing validity of alternative theories of business cycles and longer term economic cycles is described. The evaluative framework draws upon a generic model of the production sector of the economy. Evaluation of alternative theories of economic cycles is carried out by isolating the central causal elements of each theory and incorporating those elements into the basic production sector. Through computer simulation of the resulting model, relative importance of each hypothesized factor can be gauged. To illustrate the theory-testing process, the evaluative framework is applied to study the role of labor adjustments and fixed capital investment in generating economic cycles. The dominant business-cycle theories, including those of Hicks, Samuelson, and Duesenberry, center on the role of fixed capital investment in the short-term business cycle. However, analysis of the production-sector model shows that long delays inherent in planning, construction, and depreciation of capital equipment render it unlikely that investment in fixed capital is an intrinsic cause of short-term cycles. Instead, the analysis suggests that labor-acquisition and short-term production and inventory-management policies principally underlie business cycles. Moreover, capital-investment policies appear to cause a fifteen- to twenty-year cycle in potential output resembling the so-called "Kuznets cycle." By isolating the major influences on different fluctuating modes in the economy, analysis of the production sector can deepen insight into underlying causes of economic cycles and thereby contribute to design of enhanced policies for economic stabilization.

Energienachfrage und Potential Output in Gesamtwirtschaft und Industrie

Abstract: The purpose of this article is to estimate the effects of the quadrupling of oil prices at the end of 1973 on potential output of the Austrian economy as a whole and of manufacturing in particular. The hypothesis is tested that the increase of relative energy prices (energy prices relative to domestic prices) makes previous measures of potential output obsolete. Using dynamic Cobb-Douglas type production functions for estimating potential output leads to the following results. If energy is implemented in the production function (either directly as a third factor in addition to capital and labour or indirectly via relative energy prices) there is strong evidence that part of the prerecession potential output has become obsolete in the recession of 1975. A comparison with an estimated potential output which doesn't take into account energy as a factor of production indicates that such a procedure could lead to wrong policy conclusions.

The long-term effects of government deficits on the u.s. output potential

Abstract: short-term effectiveness of fiscal policy in underemployed economies is insufficient for gauging its long-term results because stock effects cannot safely be ignored. Under the government budget constraint deficits must be financed. Thus, the government's debt will rise and prevent a stock-flow equilibrium from being attained in comparative static analyses of closed economies as long as the deficit persists. However, while the import of the cumulative wealth effects of government deficits to the ultimate outcome and stability of fiscal expansion have been analyzed exhaustively in the last ten years,' their effects on private capital formation and the level of potential output have received little attention. The suspicion that deficit financing ultimately sets back the growth of private capital, first expressed by Ricardo,2 is frequently voiced in popular discourse. Yet the rigorous and lucid examination of this proposition by Phelps and Shell [21 3 has been entirely neglected in the applied literature on fiscal policy. The Phelps-Shell (PS) model deals with the alternative steady-states of a growing, fully-employed economy which are associated with different levels of government debt per head. Without introducing a money market explicitly into the model, increasing the amount of government debt outstanding may well lead to a lower stable equilibrium level of real output and of capital intensiveness, with both consumption and investment permanently lower. Furthermore, the model allows of the possibility that an increased stock of government debt crowds out more than an equal amount of private capital in the long run via its effect on the supply of saving. In that case total private wealth, including the value of all private claims on the government, would eventually be lower also. Thus the PS model yields results which are strikingly different from those obtained from models in which increasing aggregate demand raises income by lowering the excess supply of pre-given resources of capital and labor. Granting that the assumption of long-term full-employment, defined by the natural rate of unemployment of all resources is appropriate for long-run analysis, the relevance of these important theoretical insights to the conduct of fiscal policy in the United States is still uncertain. To examine whether policy inferences can be drawn is the task of this paper. If the PS model can reasonably be applied to the United States, then it contains a stern warning against the continued use of short-term stabilization policies which ultimately reduce long-term output potential